tango_gs

A foreign currency is at a forward premium if the forward rate:

A) expressed in domestic currency is below the spot rate.

B) expressed in domestic currency is above the spot rate.

C) expressed in domestic currency:foreign currency is above the spot rate.

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A foreign currency is at a forward premium if the forward rate expressed in domestic currency is above the spot rate. A forward discount exists if the forward rate is below the spot rate.

tango_gs

The current spot rate quote is GBP:USD 2.00. A 180 day forward discount for the GBP of 2% (annualized) would reflect a forward price of:

A) USD:GBP 2.02.

B) GBP:USD 1.96.

C) GBP:USD 1.98.

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The GBP is at a forward discount if the forward rate expressed in GBP:USD is below the spot rate. Since the annualized discount is 2%, the 180 day forward discount is 1% of spot, or USD 0.02.

[(1.98 − 2.00) / 2.00](360 / 180) = -2%

tango_gs

The forward rate on a 90-day contract is USD:FC 5 and the spot is USD:FC 4. The USD is trading at a forward:

A) premium of 1.0.

B) discount of 1.0.

C) premium of 0.8.

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A foreign currency is at a forward premium if the forward rate expressed in dollars is above the spot rate. Forward premium = forward rate – spot rate = 5 − 4 = 1.

bapswarrior

Today, the spot rate on Japanese yen is $0.008000 and 180-day forward yen are priced at $0.008250. The annualized forward premium is:

A) 3.125%.

B) 6.250%.

C) 6.060%.

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Forward premium = ($0.008250 − $0.008000) / $0.008000 × (360 / 180) = 0.0625 = 6.25%.

bapswarrior

Isaac Long is an English investor. He notices the 90–day forward rate for the Norwegian kroner is GBP 0.0859 and the spot rate is GBP 0.0887. Long calculates the annualized rate of the kroner to be trading at a:

A) premium of 9.478%.

B) discount of 12.63%.

C) premium of 21.17%.

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[(forward rate − spot rate) / spot rate] × (360 / number of forward contract days) = [(0.0859 − 0.0887) / 0.0887] × (360 / 90) = −0.1263 or −12.63%.

bapswarrior

Today, the spot rate on pounds sterling is $0.6960 and 90-day forward pounds are priced at $0.6925. The annualized forward discount is:

A) 2.022%.

B) 1.005%.

C) 2.012%.

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Forward discount = ($0.6925 − $0.6960) / $0.6960 × (360 / 90) = -0.02012

bapswarrior

The 90-day forward rate is EUR:USD 0.9420. Given a forward premium of EUR:USD 0.0027, what is the annualized percentage forward discount or premium for the Euro?

A) 1.150%.

B) 1.146%.

C) 11.500%.

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Since we have a forward premium, we have to subtract it from the forward rate to get the spot rate of EUR:USD 0.9393. (Note that the $ is weaker in the forward market as it takes more dollars to buy one Euro.)
The annualized percentage forward premium = (0.0027 / 0.9393) × (360 / 90) × 100 = 1.150%

bapswarrior

The spot and 30-day forward rates for the Australian dollar (AUD) are USD 0.3075 and USD 0.3120, respectively. The AUD is selling at a forward:

A) premium of USD 0.0045.

B) rate of USD 0.3075.

C) discount of USD 0.0045.

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USD 0.3120 – USD 0.3075 = USD 0.0045 premium.

bapswarrior

Assume the 1 year USD:EUR forward rate is 0.89348, the German interest rate is 3.38 percent, and the U.S. interest rate is 1.90 percent. If interest rate parity (IRP) holds, the USD:EUR spot rate is approximately:

A) 0.91204.

B) 1.56670.

C) 0.88069.

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Interest rate parity is given by:

Forward FCC = Spot FCC × [(1 + rdomestic) / (1 + rforeign)], or alternatively
Spot FCC = Forward FCC × [(1 + rforeign) / (1 + rdomestic)] = 0.89348 × (1.0190 / 1.0338) = 0.88069

Note that in this question, the dollar is the foreign currency and the Euro is the domestic currency.

bapswarrior

Assume that the domestic nominal rate of return is 4% and the foreign nominal rate of return is 5%. If the current exchange rate is FCC 0.400, the forward rate consistent with interest rate parity is:

A) 0.396.

B) 0.400.

C) 0.318.

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F/S= (1 + rD) / (1 + rF) where the currency is quoted as FCC
F = (1.04/1.05)(0.400) = 0.396