Question

You are given the following information on the Euro:

(These are direct quotes in the United States)

Spot:                            1.3570 – 1.3699

200 day forward:        1.3920 – 1.3990

300 day forward:        1.6975 – 1.7100

1. a) Compute the forward premium or discount for the Euro against the US$ for the 200 day maturity. Use only BID rates. Make sure you express this as percentages, in annual terms.

1. b) Compute the bid ask spread for the Euro against the $ for the 300 day forward.

1. c) Based on the above information, what does the market think is going to happen to the value of the Euro against the $ in 300 days?

Answer 1

a) spot bid rate is = 1.3570

200 day forward bid rate is = 1.3920

So euro is trading at a premium of (1.3920-1.3570) = 0.035 dollars = 0.035/1.3570% = 2.57%

b) quotes in 300 day forward market is 1.6975-1.7100

Bid ask spread is difference between buying and selling price

= (1.7100 - 1.6975) = 0.0125 dollars

= 0.0125/1.6975 = 0.73%

C) based on the above information we can see euro is appreciating very strongly

Value of euro for dollar in 300 days for 300 dollars is

300/1.7100 = 175.43 euros