Question

Explain the difference between a spot exchange rate and a 90 day forward rate? What is the advantage of forward rates over spot rates? Why does is cost more to use a forward rate?

Answer #1

1. Please explain the difference between spot exchange rate and
forward exchange rate

What is the difference between a spot foreign exchange rate and
a forward foreign exchange rate? How could an Indonesian exporter
use the forward rate to hedge foreign exchange risk?

Suppose that USD/sterling spot and forward exchange rates are as
follows:
Spot 1.5580
90-day forward 1.5556
180-day forward 1.5518
What opportunities are open to an arbitrageur in the following
situations?
(a) A 180-day European call option to buy £1 for $1.52 costs 2
cents.
(b) A 90-day European put option to sell £1 for $1.59 costs 2
cents.

Assume the spot rate of Switzerland franc is $0.86576 and the
90-day forward rate is $0.8716. What is the forward premium or
discount of Switzerland franc on an annualized basis? Does the
market expect Switzerland franc to appreciate or depreciate?

The following rates exist:
Current spot exchange rate: $1.80/£
Annualized interest rate on 90-day dollar-denominated bonds: 8%
(2% for 90 days)
Annualized interest rate on 90-day pound-denominated bonds: 12%
(3% for 90 days)
Financial investors expect the spot exchange rate to be $1.77/£
in 90 days.
Calculate the expected premium or discount on the
pound
What would you expect the 90-day expected spot exchange
rate to be under uncovered interest rate parity conditions using
the approximate UIRP (i.e., the investor...

Assume the following information:
Spot rate of Canadian dollar =
$.80
90-day forward rate of Canadian dollar
= $.79
90-day Canadian interest rate = 4%
90-day US interest rate = 2.5%
Explain the steps you would use in covered interest arbitrage
with $1 million of your own money (no leverage used).
What would be your profit?

If the spot rate was $1.0010/C$ and the 90-day forward rate was
$1.0108/C$, how much more (in U.S. dollars) would you receive by
selling C$1,945,000 at the forward rate than at the spot rate?
Additional revenue $

If the spot rate was $1.0130/C$ and the 90-day forward rate was
$1.0240/C$, how much more (in U.S. dollars) would you receive by
selling C$1,059,000 at the forward rate than at the spot rate?
Additional revenue $______________

The spot rate on the London market is £0.5525/$, while the
90-day forward rate is £0.5587/$. What is the annualized forward
premium or discount on the British pound? (Round answer
to 2 decimal places, e.g. 17.54%. Use 360 days for
calculation.)

The following rates exist: Current spot exchange rate: $1.80/£
Annualized interest rate on 90-day dollar-denominated bonds: 8% (2%
for 90 days) Annualized interest rate on 90-day pound-denominated
bonds: 12% (3% for 90 days) Financial investors expect the spot
exchange rate to be $1.77/£ in 90 days.
a. If he bases his decisions solely on the difference in the
expected rate of return, should a U.S.-based investor make an
uncovered investment in pound-denominated bonds rather than
investing in dollar-denominated bonds?

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