Question

Assume the quotes indicated below are from a dealer in the NY currency market. Forward prices are quoted as the absolute forward premium or discount (not percentage) in basis points (one basis point = .0001).

Part 1. Forward exchange rates

4 a. If the dealer’s spot market quotes for the Russian ruble are: 65.7120 65.7130, and the dealer’s 3-month forward quotes for the ruble are: 2003 2040, what are the dealer’s effective 3-month forward bid and ask prices for the Russian ruble?

Effective bid rate = 65.7120+0.2003 = $65.9123

Effective ask rate = 65.7130+0.2040 = $65.9170                                             

b. If a customer were to enter a 3-month forward contract with this dealer to sell ₽1m to obtain US dollars, how many US dollars would the customer receive in three months?

The bid price should be used. The amount of $ to be received = 1000000/65.9123 = $15,171.68

5. If forward prices are used as an indicator of the likely increase or decrease in value of a currency, which of the foreign currencies above are expected to increase in value over the indicated time period, and which are expected to decrease in value?

Answer 1

The bid and ask rate for 1 Russian Ruble to USD is increasing in three months, that means more USD will be needed to exchange 1 Russian Ruble. Thus, Ruble will increase in value and USD will decrease in value.