QUESTION

# For his project, Mike has found the following rates for the Swiss Franc versus dollar. in \$per \$ CHF0.80001.2500 1-month forward0.80221.2500 3-month...

For his project, Mike has found the following rates for the Swiss Franc versus dollar.

in \$               per \$

CHF                                    0.8000          1.2500

1-month forward                       0.8022           1.2500

3-month forward                        0.8037          1.2442

6-month forward                        0.7980          1.2531

The first column shows the direct quotations and the second column shows the indirect quotations. The first row shows the spot rate between the two currencies and the following rows show the forward rates with different maturities between the two currencies.

Questions:

1.In his project, Mike first wants to answer a few questions on the market's expectations for the \$/CHF rate. Mike first wants to know if the investors in the market believe that the Swiss Franc will be more or less valuable against the \$ in 6 months.

2. Mike wants to know if the investors in the market believe that the \$ will appreciate or depreciate against the CHF in 3 months.

3. Using the forward premium formula, he wants to compute the 6-month forward premium (or discount) for the CHF in American terms. The 6- month contract is a 182-day contract. What is the meaning of this number?

4. He then wants to compute the 3-month forward premium (or discount) for the \$ in European terms. The 3-month contract is a 90-day contract. What is the meaning of this number?

5. For his project, Mike needs to make an imaginary investment in a forward contract. Mike believes that the \$ will depreciate (against the CHF) over the next 6 months and it will fall below the forward rate that is given in the table. As an investment, should he take a long or a short position in the CHF forward contract?

6. If he takes a long position by buying CHF1 million 6-months forward, and if the actual spot rate 6 months later is S6m(\$/CHF) = 0.8200, what would be his profit (loss