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The SF/$ spot exchange rate is SF1.25/$ and the 180 day forward exchange rate is SF1.30/$. The forward premium (discount) is A. the dollar trading at a 4% premium to the Swiss franc for delivery in 180 days. B. the dollar trading at an 8% premium to the Swiss franc for delivery in 180 days. C. the dollar trading at a 4% discount to the Swiss franc for delivery in 180 days. D. the dollar trading at an 8% discount to the Swiss franc for delivery in 180 days.

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jepessoa

Answer:

B) the dollar trading at a 8% premium to the Swiss franc for delivery in 180 days.

Explanation:

The spot rate is the current exchange rate, SF1.25/$, means that you need 1.25 Swiss francs to purchase 1 US dollar.

The forward rate is the exchange rate in 180 days (6 months), SF1.30/$, means that in 6 months you will need 1.30 Swiss francs to purchase 1 US dollar.

The forward premium refers to the difference between a higher future exchange rate (forward) and a lower current exchange rate (spot). In this case, the forward premium = SF1.30/$ - SF1.25/$ = SF0.05/$

Since the dollar is appreciating against the Swiss franc, the forward premium = SF0.05 / SF1.25 = 0.04 or 4% for 6 months x 2 = 8% premium for the year

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