Question

1. Using the following data, answer the following questions:

Spot:                                                                      £1 = $1.4487

30‑day forward:                                                   £1 = $1.4498

90‑day forward:                                                   £1 = $1.4511

180‑day forward:                                                £1 = $1.4529

• How much would £1,500,000 cost in dollars?
• Is the British pound expected to appreciate or depreciate over the next 6 months?
• What is the 90-day forward premium or discount for the British pound?

ALL IS ONE PROBLEM

Answer 1

1) Considering the spot rate of £1 = $1.4487,

£1,500,000 will cost = 1,500,000 x 1.4487 = $2,173,050

2) Over the next 6 months £1 is expected to cost $1.4529

$1.4529 > $1.4487

i.e expected 6 months rate > spot rate

Therefore, it takes more $ to buy £1, the British pound is expected to appreciate over the next 6 months.

3) The 90 day forward premium/ discount for the pound is calculated as-

(Forward rate - spot rate/ spot rate) x 100

=($1.4511 - $1.4487/1.4487) x 100 = 0.1657% (forward premium)

Do let me know in the comment section in case of any doubt.