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 spot and 30-day forward exchange rates for the Swiss franc (CHF) are USD:CHF 0.59984 and USD:CHF 0.62734, respectively. Relative to the USD, the CHF is selling at a forward:

A) discount of $0.073.

B) differential of 275 points.

C) premium of $0.073.

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Forward Discount = Forward rate − Spot Rate = (1 / 0.62734) − (1 / 0.59984) = −$0.073
Since the forward rate is less than the spot rate, the Swiss franc is selling at a forward discount. Note that although in percentage terms, ($0.073 / 1.667) = −4.38%, when the forward discount is expressed in percentage terms, it is done so on an annualized basis. The correct forward premium expressed as a percentage would be equal to 0.0438 × (360 / 30) = 52.60%.

tango_gs

If the 90-day forward rate for the CAD is USD 0.6503, and the spot rate is USD 0.6403, then the annualized premium is:

A) 6.25%.

B) 1.00%.

C) 1.56%.

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Annualized premium = [(0.6503 − 0.6403) / 0.6403] × (360 / 90) = 0.625 or 6.25%.

tango_gs

The spot and 30-day forward rates for the Euro are $1.1525 and $1.1015, respectively. The Euro is selling at a forward:

A) discount of $0.051.

B) discount of 0.956%.

C) premium of $0.051.

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Since the forward rate is less than the spot rate, the Euro is selling at a forward discount. The amount of the discount is calculated as follows:

Forward Discount = Forward rate – Spot Rate = $1.1015 - $1.1525 = -$0.051.

tango_gs

The spot exchange rate is FCC 2.000. The foreign return is 15% and the domestic return is 12%. Which of the following is closest to the forward exchange rate?

A) 0.487.

B) 2.576.

C) 1.948.

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We want to create a no arbitrage condition. According to the Interest Rate Parity Theorem, if the following condition does not hold, investors will take advantage of interest rate differentials to capitalize on arbitrage opportunities.

ForwardFCC = SpotFCC × [(1 + rdomestic) / (1 + rforeign)]

This condition is the formal representation of interest rate parity.

Here, ForwardFCC = 2.000 × [(1 + 0.12) / (1 + 0.15)] = 2.000 × 0.97391 = 1.94783 or about 1.948.

tango_gs

If the liquidity on a foreign currency forward contract decreases, the direct quote:

A) and the indirect quote spreads will widen.

B) spread will narrow and the indirect quote spread will widen.

C) spread will widen and the indirect quote spread will narrow.

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Both the direct quote and the indirect quote spreads will widen as the liquidity on a foreign currency forward decreases.

tango_gs

In an attempt to reduce her inventory, a dealer holding excess foreign currency should:

A) move the midpoint of her direct quote down.

B) move the midpoint of her direct quote up.

C) quote a narrower bid-ask spread.

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To reduce inventory, a dealer holding excess foreign currency should move the midpoint of her direct quote down. If the dealer narrows the spread, her bid price would rise at a time when she does not want to buy.

tango_gs

An American wants to buy six cases of champagne. Each case costs 390 SEK. If the USD:SEK exchange rate is 6.90, what is the USD cost of the champagne?

A) USD 339.13.

B) USD 2,340.00.

C) USD 56.52.

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Total SEK cost = 390 × 6 = 2,340 SEK. Invert the quote = 1 / 6.9 = SEK:USD 0.1449 .
Total dollar cost = SEK:USD 0.1449 × 2,340 SEK = USD 339.13

tango_gs

Which of the following statements best describes a six month forward foreign currency spread? The six month forward foreign currency spread:

A) tends to be larger than the spot spread.

B) is the same as the spot spread.

C) tends to be smaller than the spot spread.

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The forward foreign currency spreads tend to be larger than the spot spreads.

tango_gs

Assume that the GBP:USD six-month forward rate is quoted at a bid of 1.72546 and an ask of 1.72776. What is the spread on the indirect quote for a U.S. dealer?

A) USD:GBP 0.000772.

B) GBP:USD 0.000772.

C) GBP:USD 0.002300.

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For an indirect quote, the bid and ask prices must be converted to USD:GBP. This is accomplished by taking the reciprocal of each and then subtracting the bid from the ask price. 1 / 1.72546 = USD:GBP 0.579556
1 / 1.72776 = USD:GBP 0.578784
The spread is 0.578784 − 0.579556 = USD:GBP 0.000772