Purchase Solution

Interpreting Spot and Forward Rates

Not what you're looking for?

Ask Custom Question

Exchange rates for several currencies are shown below. They are shown as direct or indirect from the standpoint of a U.S. company.

U.S. Dollar/Yen U.S. Dollar/ Peso Euro/U.S. Dollar
(indirect) (indirect) (direct)
Spot 105 11.50 1.30
30-day forward 104 11.60 1.31
90-day forward 103 11.65 1.35
180-day forward 101 11.80 1.36

a. Is the U. S. dollar appreciating or depreciating against the yen? Explain.

b. Is the U.S. dollar appreciating or depreciating against the peso? Explain.

c. Is the U. S. dollar appreciating or depreciating against the euro. Explain.

d. A U.S. company purchases from suppliers in Japan, Mexico, and the Netherlands and pays in the suppliers' currency. For each of the suppliers, will the U.S. company pay more or less in 30 days than now, assuming the 30-day forward rate becomes the spot rate at the end of 30 days.

e. Who bears the currency risk--the U.S. company or the foreign supplier? Why?

Purchase this Solution

Solution Summary

This solution illustrates how to interpret the direction in which different currency pairs are moving by comparing the spot rate to the forward rates.

Solution Preview

The spot rate of a currency is the rate at which it can be purchased currently. Each forward rate is the rate at which market participants expect it to be purchased in the future. Thus, the 30-day spot rate is the rate at which market participants believe it will be purchased in 30 days.

a. Is the U. S. dollar appreciating or depreciating against the yen? Explain.

The U.S. dollar is depreciating against the yen. One U.S. dollar will but 105 Japanese yen today, but it will buy only 101 yen in 180 days.

b. Is the U.S. dollar ...

Purchase this Solution


Free BrainMass Quizzes
Income Streams

In our ever changing world, developing secondary income streams is becoming more important. This quiz provides a brief overview of income sources.

Business Processes

This quiz is intended to help business students better understand business processes, including those related to manufacturing and marketing. The questions focus on terms used to describe business processes and marketing activities.

Academic Reading and Writing: Critical Thinking

Importance of Critical Thinking

Managing the Older Worker

This quiz will let you know some of the basics of dealing with older workers. This is increasingly important for managers and human resource workers as many countries are facing an increase in older people in the workforce

Understanding the Accounting Equation

These 10 questions help a new student of accounting to understand the basic premise of accounting and how it is applied to the business world.