Exchange Rate Question

I am having issues with the following, and trying to figure out when to use the rate given and when to use the reciprocal…I got the answers right because of deduction/luck, but I do not think that will work on the test. Isaac Long is an English investor. He notices the 90–day forward rate for the Norwegian kroner is GBP0.0859 and the spot rate is GBP0.0887. Long calculates the annualized rate of the kroner to be trading at a: A) discount of 12.63%. B) premium of 9.478%. C) premium of 21.17%. So is what they are saying equivalent to: Spot = .0887 GBP/Kroner Forward = .0859 GBP/ Kroner ??? The spot and 30-day forward exchange rates for the Swiss franc (CHF) are 0.59984 CHF/USD and 0.62734 CHF/USD, respectively. Relative to the USD, the CHF is selling at a forward: A) differential of 275 points. B) premium of \$0.073. C) discount of \$0.073. Your answer: C was correct! 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%. Your answer: A was correct! [(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%.

Q1. SR = 0.0887 GBP/KR FR = 0.0859 GBP/KR -0.0028/0.0887*360/90*100% = -12.62683% = A Q2. SR = 0.59984 CHF/USD FR = 0.62734 CHF/USD SR_adj = 1.66711 USD/CHF FR_adj = 1.59403 USD/CHF = -0.07308 = C

For question 1 you can skip the work because you already know its a discount.

swaptiongamma Wrote: ------------------------------------------------------- > Q1. > SR = 0.0887 GBP/KR > FR = 0.0859 GBP/KR > -0.0028/0.0887*360/90*100% = -12.62683% = A > > Q2. > SR = 0.59984 CHF/USD > FR = 0.62734 CHF/USD > > SR_adj = 1.66711 USD/CHF > FR_adj = 1.59403 USD/CHF > = -0.07308 = C Just look at this superb coding in formulating answers. SR_adj it is