Question

Use the following spot and forward​ bid-ask rates for the Japanese​ yen/U.S. dollar​ (¥/$) exchange rate from September​ 16, 2010, to answer the following​ questions:

a. What is the annual forward premium on the yen for all​ maturities? (Assume that the U.S. dollar is the home currency. Also use the​ Mid-Rate values computed in part​ a.)

b. Which maturities have the smallest and largest forward​ premiums?

Period	¥/$ Bid Rate	¥/$ Ask Rate
spot	85.99	86.03
1 month	85.61	85.66
2 months	85.5	85.55
3 months	84.97	85.01
6 months	83.79	83.82
12 months	83.52	83.56
24 months	82.43	82.47
Period	Forward	¥/$	¥/$	Premium
Spot	0	85.99	86.03
1 month	30	85.61	85.66		%
2 months	60	85.5	85.55
3 months	90	84.97	85.01
6 months	180	83.79	83.82
12 months	360	83.52	83.56
24 months	720	82.43	82.47

Answer 1

Given.

Period	Forward	¥/$	¥/$
Spot	0	85.99	86.03
1 month	30	85.61	85.66
2 months	60	85.5	85.55
3 months	90	84.97	85.01
6 months	180	83.79	83.82
12 months	360	83.52	83.56
24 months	720	82.43	82.47

Solution :-

A BIDE=cto F (6) The 24-month matunity Period Days 1$ ¥1$ Forward Bid rate Ask rate forward has the smallest Premium, mid-rate Premium While 1-month maturity Spot 85.99 86.03 86.01 has the largest premium. 1 month 30 85.61 85.66 85.635 5.25486% 3 months 60 85.50 85.55 L 85.525 3.40251 % 3 months 90 84.97 85.01 84.99 4.80056 y. 6 months 180 83.79 83.87 83.805 5.362224 83.57 | 83.56 2 months 360 2.95667 % 83.54 720 24 months 82.43 82.47 2.158887 82.45 Formula For Forward Premium Forward Premium Mid-rate Spot - mid-rate forward, 360 days mid rate Forward Days Forward