6. Using Exhibit 5.4, calculate the one-, three-, and six-month forward premium or discount for the U.S. dollar versus the British pound using European term quotations. For simplicity, assume each month has 30 days. What is the interpretation of your results?
Solution: The formula we want to use is:
fN,$ = [(FN (￡/$) - S(￡/$))/S(￡/$)] x 360/N f1,$ = [(.5251 - .5242)/.5242] x 360/30 = -.0023 f3,$ = [(.5268 - .5242)/.5242] x 360/90 = -.0198 f6,$ = [(.5290 - .5242)/.5242] x 360/180 = -.0183
The pattern of forward premiums indicates that the British pound is trading at a discount versus the U.S. dollar. That is, it becomes more expensive to buy a U.S. dollar forward for British pounds (in absolute but not percentage terms) the further into the future one contracts.
7. Given the following information, what are the NZD/SGD currency against currency bid-ask quotations?
American Terms European Terms
Bid Ask
Bid Ask
1.3751 1.3765 1.6287 1.6300
Bank Quotations New Zealand dollar Singapore dollar
.7265 .7272 .6135 .6140
Solution: Equation 5.12 from the text implies Sb(NZD/SGD) = Sb($/SGD) x Sb(NZD/$) = .6135 x 1.3765 = .8445. The reciprocal, 1/Sb(NZD/SGD) = Sa(SGD/NZD) = 1.1841. Analogously, it is implied that Sa(NZD/SGD) = Sa($/SGD) x Sa(NZD/$) = .6140 x 1.3765 = .8452. The reciprocal, 1/Sa(NZD/SGD) = Sb(SGD/NZD) = 1.1832. Thus, the NZD/SGD bid-ask
spread
is
NZD0.8445-NZD0.8452
and
the
SGD/NZD
spread
is
SGD1.1832-SGD1.1841. 8.
Assume you are a trader with Deutsche Bank. From the quote screen on your computer
terminal, you notice that Dresdner Bank is quoting