Question

The direct quotation for EUR dollar is 1.15 USD. The annual forward premium is 7%.

a) Do you expect the USD to appreciate or depreciate?

b) What is the 180-day forward rate on a contract to purchase USD with EUR?

Answer 1

a) Quotation = 1.15 USD/EUR = 1/1.15 = 0.8695652174 EUR/USD

If the forward premium is 7%, then EUR (the base currency) is expected to appreciate. In other words, USD is expected to depreciate.

b) 180 day forward rate = 1.15 * (1 + 0.07 * 180 / 360) = 1.19025 USD/EUR

If we want the forward rate to purchase USD, we should have USD as the base currency. So, take the reciprocal of 1.19025 to get 1/1.19025 = 0.8401596303 EUR/USD

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