Credit Suisse First Boston (CSFB) quotes the following rates for the U.S. dollar. a. Is the dollar
Question:
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a. Is the dollar selling at a forward premium or a forward discount? Calculate percentage premiums or discounts for each forward quote. Also state these percentage premiums or discounts on an annualized basis.
b. Convert these to $/‚¬ quotes for the euro. Is the euro selling at a forward premium or a forward discount? Calculate percentage premiums or discounts (not annualized) for each forward quote on the euro. Also state these percentage premiums or discounts on an annualized basis.
c. Are the percentage forward premiums on the dollar equal in magnitude to the corresponding forward discounts on the euro? Why or why not?
d. What would you receive from CSFB if you sold $10 million at the 6-month forward rate?
e. What would you pay CSFB if you bought ‚¬10 million at the 12-month forward rate?
Step by Step Answer:
a The dollar in the denominator is selling at a forward premium b Quotes and the associated discounts for the euro are as follows c The percentage premiums on the dollar are almost but not quite equal in magnitude to the corresponding percentage discounts on the euro The difference in magnitude is because of the algebra of compound returns Forward dollar premiums in this problem are based on a 05 percent per month forward premium on the dollar Over 12 months this compounds to 100512 1 617 percent dollar premium The corresponding 12month euro forward discount ...View the full answer
Multinational Finance Evaluating Opportunities Costs and Risks of Operations
ISBN: 978-1118270127
5th edition
Authors: Kirt C. Butler
