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Spot and Forward Prices

A. Illustrate the concept of "Spot-Forward pricing parity" relationship with a numerical example.
B. What are the implications of this for Foreign Exchange Market?

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Spot-Forward Pricing Parity Concept

Spot- forward pricing parity concept is a term used in forward contracts for valuation of underlying assets. With this spot-forward parity, the relationship between spot and forward price in forward market is defined. The value of currency fluctuates continuously in the market, with this concept; investors try to bring stability into the market by minimizing the risk factor associated with the forward market (Brigham & Houston, 2009). There are basically three elements involved with the concept namely forward price, spot price and cost of carry. The concept states that if a product is purchased today and kept for the future contract then the future price of the product should be equal to the price at which the product is purchased today after deducting the expenditures like carrying cost etc.

The concept ...

Solution Summary

The concept of "Spot-Forward Pricing Parity" relationship with a numerical example is examined. The implications of the foreign exchange market is determined.