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Given the following information, as a market dealer, how will you quote bid and ask prices...

Given the following information, as a market dealer, how will you quote bid and ask prices for a 6-month AUD/USD forward contract? (Assume all the interest rates are periodically compounded.)

Bid Ask
Spot Rate: AUD/USD 0.7048 0.7068
AUD 6-month LIBOR 2.00% 2.50%
USD 6-month LIBOR 0.50% 1.00%
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Answer #1

Forward Rate AUD/USD = Spot Rate AUD/USD ( 1+ 6 month interest rate in AUD / 1+ 6 month interest rate in USD)

Bid Price:

Forward Rate AUD/USD = Spot Rate AUD/USD ( 1+ 6 month interest rate in AUD (bid) / 1+ 6 month interest rate in USD (ask))

Forward Rate AUD/USD = 0.7048 (1.01/1.005) = 0.7083

Ask Price:

Forward Rate AUD/USD = Spot Rate AUD/USD ( 1+ 6 month interest rate in AUD (ask) / 1+ 6 month interest rate in USD (bid))

Forward Rate AUD/USD = 0.7048 (1.0125/1.0025) = 0.7118

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