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Forward rate, Appreciation/ Depreciation of currency

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1. Smith is a currency trader and is reviewing forward foreign exchange rates. His investors have made several statements regarding foreign exchange rates. Which of the following statements is correct and can help Smith predict future spot exchange rates? According to the foreign exchange expectation relation forward:

A) discounts and premiums can be unbiased predictors of expected changes in spot exchange rates.
B) rates are biased predictors of expected changes in spot exchange rates.
C) discounts and premiums can be effective predictors of expected spot exchange rates.
D) rates are unbiased predictors of interest and inflation rates.

2. Jones is an international currency portfolio manager seeking speculative opportunities in the euro. While reviewing the forward rates for the euro, he notices that there is a forward premium of 4.25 percent on the euro to the U.S. dollar (EUR/USD). Which of the following statements is correct? The euro is expected to:

A) depreciate 4.25 percent against the U.S. dollar.
B) appreciate at least 4.25 percent against the U.S. dollar.
C) appreciate 4.25 percent against the U.S. dollar.
D) depreciate at least 4.25 percent against the U.S. dollar by the premium implied in the euro forward rate.

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Solution Preview

1. Smith is a currency trader and is reviewing forward foreign exchange rates. His investors have made several statements regarding foreign exchange rates. Which of the following statements is correct and can help Smith predict future spot exchange rates? According to the foreign exchange expectation relation forward:

A) discounts and premiums can be unbiased predictors of expected changes in spot exchange rates.
B) rates are biased predictors of expected changes in spot ...

Solution Summary

Answers 2 multiple choice questions on exchange rate.

$2.19
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The foreign exchange quotations...

(See attached file for full problem description)

1. The foreign exchange quotations shown below are for the Swiss franc (SF) and the U.S. dollar ($).

U.S. Dollar Equivalent Currency per U.S. Dollar
Wednesday Tuesday Wednesday Tuesday
Bid Ask Bid Ask Bid Ask Bid Ask

Spot 0.6506 0.6508 0.6536 0.6539 1.5365 1.5370 1.5293 1.5300
30 day 0.6496 0.6500 0.6523 0.6529 1.5385 1.5400 1.5315 1.5330
90 day 0.6470 0.6481 0.6499 0.6515 1.5430 1.5457 1.5350 1.5386

Answer the following questions based on the exchange rates shown in the table above.

a. What is the percentage appreciation/depreciation of the SF using indirect ask quotes for the SF?

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b. What is the percentage premium/discount on the SF using indirect bid quotes for the dollar? Using a 30-day forward rate?

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c. A customer wishes to buy the SF on Wednesday. What is the exchange rate for this transaction using indirect quotes for the SF?

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d. Show the point quotes on Wednesday using indirect quotes for the dollar. Without doing any calculation, can you identify the currency on premium? Also, give a rationale for your answer.

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