Question

The following data are taken from the financial market pages of an Australian newspaper.

Forward Margins

Forward Contract	Forward Margins (Buy A$/Sell A$)
1 month	0/1
2 months	1/2
3 months	1/3
6 months	2/4
1 year	0/1
2 years	-16/-8
3 years	-51/-11

The data under the “Forward Margins” column represent the forward contracts for the US dollar with respect to the Australian dollar (given in points form).

A) What do the forward rates indicate in terms of whether the A$ is expected to strengthen or weaken with respect to the US dollar?

Answer 1

All the forward points over 1, 2, 3 & 6 month(s) and 1 year are positive.

This means we need higher quantum of A$ to buy 1 US $ over these months.

Hence, in the short run, i.e. over next 1 to 6 months or upto 1 year,  A$ is expected to weaken w.r.t US $.

However, all the forward points over medium to long run i.e. over 2 years and 3 years are negative.

This means we need lower quantum of A$ to buy 1 US $ over 2 & 3 years.

Hence, in the long run, i.e. over next 2 to 3 years,  A$ is expected to strengthen w.r.t US $.