1. Go to https://www.investopedia.com/terms/s/spot-next.asp web site and read the
FX forward rates.
2. Read the following specification of FX forward:
https://www.kdbbank.eu/forward-rate-quotation
3. As a currency trader, you see the following quotes on your computer screen:
Exch. Rate Spot 1-month 3-month 6-month
USD/EUR 1.0435/45 20/25 75/90 97/115
JPY/USD 98.75/85 12/10 25/19 45/35
USD/GBP 1.6623/33 30/35 95/110 120/130
a. What are the outright forward bid and ask quotes for the USD/EUR, JPY/USD and
USD/GBP at the 1-month, 3-month and 6-month maturity?
Answer: The spot bid and ask quotes for USD/EUR are 1.0435/45. These quotes mean that
the bank buys euros with dollars spot at $1.0435/€, and the bank sells euros for dollars at
$1.0445/€. Because the forward points at the 3-month maturity are 75/90, we know that we
must add the points to get the outright forward bid and ask rates. Adding the points makes the
bid-ask spread in the forward market larger than the bid-ask spread in the spot market.
Consequently, the forward bid rate is $1.0435/€ + $0.0075/€ = $1.0510/€, and the forward
ask quote is $1.0445/€ + $0.0090/€ = $1.0535/€.
b. Calculate the bid-ask spread in the forward market and compare it to bid-ask spread
in the spot market.
c. Suppose you want to swap out of $10,000,000 and into yen for 3 months. What are
the cash flows associated with the swap?
Answer:
1, Change USD do JPY at spot rate:
When you swap out of $10,000,000 into yen in the spot market, you are selling dollars to the
bank. The bank buys dollars at its low bid rate of ¥98.75/$, so you get
¥98.75/$ $10,000,000 = ¥987,500,000
2, Change back JPY to USD at FWD rate:

When you contract to buy the $10,000,000 back from the bank in the 3-month forward market,
you must pay the bank’s ask rate of
¥98.85/$ - ¥00.19/$ = ¥98.66/$
You subtract the points because the 3-month forward quote is 25/19. Subtracting the points
makes the bid-ask spread in the forward market larger than the bid-ask spread in the spot
market. Hence, the amount of yen you pay is
¥98.66/$ $10,000,000 = ¥986,600,000
4. Intel is scheduled to receive a payment of ¥100,000,000 in 90 days from Sony in
connection with a shipment of computer chips that Sony is purchasing from Intel.
Suppose that the current exchange rate is ¥103/$, that analysts are forecasting that
the jen will weaken by 1% over the next 90 days, and that the standard deviation
of 90-day forecasts of the percentage rate of depreciation of the dollar relative to
the yen is 4%.
a. Provide a qualitative description of Intel’s transaction exchange risk.
Answer: Intel is a U.S. company, and it is scheduled to receive yen in the future.
What is the risk for the Intel? Appreciation or depreciation of JPY?
A weakening of the yen versus the dollar causes a given amount of yen to convert to fewer
dollars in the future. This loss of value could be severe if the yen depreciates by a significant
amount.
b. If Intel chooses not to hedge its transaction exchange risk, what is Intel’s expected
dollar revenue?
Answer: If Intel chooses not to hedge, the expected dollar revenue is the expected dollar value
of the ¥100,000,000. The expected spot rate incorporates a 1% weakening of the jen or USD
strengthen. This means that the expected USD/JPY rate is 1% less than the current spot rate of
¥103/$ or
Et[S(t+90, ¥/$)] = 1.01 ¥103/$ = ¥104.03/$
Hence, Intel expects to receive ¥100,000,000 / ¥104.03/$ = $961,261
versus: ¥100,000,000 / ¥103/$ = $970, 874
c. If Intel does not hedge, what is the range of possible dollar revenues that incorporates
95.45% of the possibilities?
Answer: We are told that the standard deviation of the rate of depreciation of the dollar is 4%.
The standard deviation of the future spot rate is therefore 4% of the current spot rate or 0.04
¥103/$ = ¥4.12/$. Thus, plus or minus 2 standard deviations around the conditional expected
future spot rate is
¥104.03/$ + ¥8.24/$ = ¥112.27/$
¥104.03/$ - ¥8.24/$ = ¥95.79/$
The range that encompasses 95.45% of possible future values for Intel’s receivable is
therefore
¥100,000,000 / ¥112.27/$ = $890,710



¥100,000,000 / ¥95.79/$ = $1,043,950
5. Consider the following spot and forward rates for the yen–euro exchange rates:
Spot 30 days 60 days 90 days 180 days 360 days
146.30 145.75 145.15 144.75 143.37 137.85
Is the euro at a forward premium or discount? What are the magnitudes of the forward
premiums or discounts when quoted in percentage per annum for a 360-day year?
Answer: The forward rates of yen per euro are lower than the spot rates. Therefore, the JPY is
at a discount in the forward market. The annualized forward premium or discount for the N day
forward contract is
𝐹 − 𝑆
𝑆
𝑥
360
𝑁 𝑑𝑎𝑦𝑠
𝑥 100
If the value of this calculation is negative, say -2%, we say there is a 2% discount.
The discounts are 4.51% for 30 days, 4.72% for 60 days, 4.24% for 90 days, 4.01% for 180
days, and 5.78% for 360 days.
Calculation 30 days:
145.75 − 146.30
146.30
𝑥
360
30
𝑥 100 = 4.51%