The Wall Street Journal reported the following spot and forward rates for the Swiss franc (\(/SF):

Spot .................................................... \)0.8202

30-day forward ................................... \(0.8244

90-day forward ................................... \)0.8295

180-day forward ................................. \(0.8343

a. Was the Swiss franc selling at a discount or premium in the forward market?

b. What was the 30-day forward premium (or discount)?

c. What was the 90-day forward premium (or discount)?

d. Suppose you executed a 90-day forward contract to exchange 100,000 Swiss francs into U.S. dollars. How many dollars would you get 90 days hence?

e. Assume a Swiss bank entered into a 180-day forward contract with Bankers Trust to buy \)100,000. How many francs will the Swiss bank deliver in six months to get the U.S. dollars?

Spot rate: - Spot rates are those rates that are applicable on buying or selling currencies at the spot (immediately)

Forward rate: - Forward rates are those rates that are applicable on buying or selling currencies at the future specified date.

$\begin{array}{c}\mathrm{Spot}=\mathrm{\$}0.8202\\ 1\mathrm{Swiss}\mathrm{franc}=\mathrm{\$}0.8202\end{array}$

Hence, the Swiss franc is selling at a discount.

Spot rate= $0.8202

30 days forward rate= $0.8244

$\mathbf{Forward}\mathbf{premium}\mathbf{/}\mathbf{discount}\mathbf{rate}\mathbf{=}\frac{\mathbf{Forward}\mathbf{-}\mathbf{Spot}}{\mathbf{Spot}}\mathbf{\times }\frac{\mathbf{12}}{\mathbf{months}}\mathbf{\times }\mathbf{100}$

$\begin{array}{l}=\frac{\mathrm{\$}0.8244-\mathrm{\$}0.8202}{\mathrm{\$}0.8202}\times \frac{12}{1}\times 100\\ =\frac{\mathrm{\$}0.0042}{\mathrm{\$}0.8202}\times \frac{12}{1}\times 100\\ =6.14\mathrm{\%}\end{array}$

Spot rate= $0.8202

90 days forward rate= $0.8295

$\mathbf{Forward}\mathbf{}\mathbf{premium}\mathbf{/}\mathbf{discount}\mathbf{}\mathbf{rate}\mathbf{=}\frac{\mathbf{Forward}\mathbf{-}\mathbf{Spot}}{\mathbf{Spot}}\mathbf{\times }\frac{\mathbf{12}}{\mathbf{months}}\mathbf{\times }\mathbf{100}$

$\begin{array}{l}=\frac{\mathrm{\$}0.8295-\mathrm{\$}0.8202}{\mathrm{\$}0.8202}\times \frac{12}{3}\times 100\\ =\frac{\mathrm{\$}0.0093}{\mathrm{\$}0.8202}\times \frac{12}{3}\times 100\\ =4.53\mathrm{\%}\end{array}$

90 days forward price= $0.8295

Swiss franc= 100,000

$\begin{array}{c}\mathrm{Dollars}=\mathrm{Swiss}\mathrm{franc}\times \mathrm{Forward}\mathrm{price}\\ =100,000\times \mathrm{\$}0.8295\\ =\mathrm{\$}82,950\end{array}$

180 days forward price= $0.8343

U.S. dollars= 100,000

$\begin{array}{l}=\frac{\mathrm{\$}100,000}{\mathrm{\$}0.8343}\\ =119,860\mathrm{Swiss}\mathrm{franc}\end{array}$