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Spot-Forward Exchange Rates

A FX dealer in London normally quotes spot, 1M, 3M and 6M forward. When you ask over the phone for current quotes for YEN/USD you hear "111.43 to 51, 52 to 48, 150 to 144, 337 to 205"
a)what would you receive in USD if you sold YEN 300,000,000 spot?
b)what would it cost you to purchase YEN 400,000,000 forward 3M with USD? When would you make payment for the forward transaction?
c) in New York, 6M T-bill yields 6% per annum. Using mid rates, calculate the yield on Japanese 6M bills
d)Verify your answer to part c with a hypothetical investment of $1,000,000 for 6M in both countries. Use mid rates for simplicity and ignore charges and taxes

Solution Preview

Bid Ask
Spot 111.43 111.51
1M 111.48 111.52
3M 111.44 111.50
6M 112.05 113.37

a)what would you receive in USD if you sold YEN 300,000,000 spot?

The ask rate for spot dollars= 111.51 Yen/$
Therefore if you sell 300,000,000 Yen you would get $2,690,341.67 =300000000/111.51

b)what would it cost you to purchase YEN 400,000,000 forward 3M with USD? When would you make payment for the forward transaction?

The bid rate for 3 M Yen= 111.44 Yen/$
This ...

Solution Summary

Questions on exchange rate quotations have been answered.

$2.19