Quiz 3: Forward Markets and Transaction Exchange Risk


In this instance of 90 day forward rate transaction, the transaction would be known to be at discount in the forward market because the spot rate of Japanese yen per a dollar at the time of entering into contract is higher than the 90 day forward rate of yen per dollar. To express the degree of the discount as a percentage for a year of 360-day do calculation as follows: img Thus, the dollar is at discount of 9.456%.

Forward exchange rate is prices at which a bank agrees to exchange one country currency for another on a future date agreed with an investor. Find 90-day forward contract delivery date by using following process: First: find the spot date that would fall usually after two business days from the day on which the contract is made. Second: The forward date will be falling on a calendar date in three months relevant to the calendar date of the spot value. If the forward value date that was determined is legitimate business day in both the countries of currencies then that date would be forward value date. However, if the banks are closed on that date in one of the currency countries for the reason that of holiday or weekend in that case next available business day of that month would become a forward value date. The principle of going backward in time which otherwise known to be as End-End rule must be implemented if going forward for next business day takes us out of that month. The rule only should be followed in circumstances exception of spot value day becoming the end of business days of existing month, if the forward value day becomes end of business days in three months for both the countries. However delivery date of a forward contract would be done always at the maturity date of the contract.

Determine the day on which exchange of currencies would happen in a forward contract as follows: • Finding the Spot value date which would be falling after two business days from the day on which contract was made. In this instance of spot contract on Tuesday, January 18, 2011 the exchange of currencies would take place on Thursday, January 20, 2011. • Finding maturity day of 30 day forward contract which needs the calculation of 30 days from the date of exchange of currencies. In this instance if calculate 30 days from January 20, 2011, so the maturity date will be February 20, 2011 subject to condition of being a legitimate business day. • But as far as in this case it was mentioned that February 18, 2011 was Friday that clearly implies February 20,2011 as a Sunday which was a non-business day hence move on to next business day which is February 21 2011, that is Monday, but it is also stated that Monday is a holiday. • Hence the settlement of the aforesaid forward contract would take place on Tuesday that is 22/2/2011.

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