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Hi John
I would appreciate if you could help me with the question below: q92.3
The current spot rate for the dollar/euro is $\€ 2.000 +/- 0.003. The dollar is quoted at a 0.2c premium for the forward rate. What will a $2,000 receipt be translated to at the forward rate:
A € 4,002
B €995.50
C € 998.00
D € 4,008
This question is a bit confusing for me, to start with my understanding was that the spot rate is predominately used for money hedging and can’t quite work out the adding and subtracting the premium.
Would really appreciate your advise.
Thank you in advance.
AgnesBecause we are receiving dollars we need to convert at the higher rate. Therefore if we were converting at spot it would be 2.0030
However we need the forward rate and is it is quoted at a 0.2c premium, it means that the dollar will be stronger, i.e. 1 euro will buy fewer dollars. So the forward rate will be lower by 0.2c which is $0.002.
So the relevant rate to use for converting is 2.0030 – 0.0020 = 2.0010.
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