I am getting most of these questions wrong, Can someonbe explain how to approach these problems in a logical way. These shoud be easy… === An analyst notices the following exchnge rates in the newspaper SFr/C$: 1.0542 SFr/C$ 3-month forward: 1.0612 Is the swiss frank tradng at a premium or discount relative to the canadian dollar in the forward market and what is the annualized forward discount or premium ==Trading relative to Canadian$==============Annualized forward rate== A)==Discount=============================0.66%============== B)==Discount=============================2.66%============== C)==Premium=============================0.66%============== D)==Premium=============================2.66%============== === Thanks
B if i am right i’ll tell you my logic
I get most of these wrong myself, but my guess is B. I guessed a discount since there seem to be more SFr /C$ in the 3 month forward. Forward Discount = 1.0612 - 1.0542 / 1.0542 = .66 Anuallizing this ((1.0066)^ 2 -1 ) * 2 = 2.66
C? PREMIUM and 0.65366%
The correct answer is B. Florin pop can you explain how it is on premium. Which one should be the domestic currency here?
RE thought my answer and changed to a B. But it takes more SFr to buy a CAD 6 months in the future so the SFr is at a discount.
SFr/C$: 1.0542 Spot 1Cdn buys=1.0542 SFR SFr/C$ 3-month forward: 1.0612 FWD 1Cdn buys=1.0612 SFR The thing is that in the future with same amount of money-1CDN- you will be able to buy more SFR so it will be cheaper. if you could have bought 1 cdn with 1.0542SFR now(in 3 months) you need 1.0612SFR to buy one Cdn so the loss in value is 1.0612-1.0542 that would be 0.66% for 3 months - annualized 0.66*360/90=2.656
Wow… thats a solid and intuitive explanation, Florin.
but what happens to the rule that domestic currency (in this case francs) are at a premium if the forward rate is more than the spot rate? where is this question from ?
Niraj, I had same confusion. I read notes closely & it says when rate is expressed as “DC/FC” & forward rate is more than spot rate then “FOREIGN CURRENCY” is at premium.
goel_ar i got it now. CAD is domestic since it is Swiss per Cad so Swiss becomes foreign and thus it is at premium. tell me if i understood this wrong people… GOD!