Question

Andreas Broszio​ (Geneva). Andreas Broszio just started as an analyst for Credit Suisse in​ Geneva, Switzerland. He receives the following quotes for Swiss francs against the dollar for​ spot, 1 month​ forward, 3 months​ forward, and 6 months forward. Spot exchange​ rate: Bid rate SF1.2573​/$ Ask rate SF1.2599​/$ ​1-month forward 10 to 15 ​3-months forward 14 to 22 ​6-months forward 20 to 30 The current​ one-year U.S.​ T-Bill rate is 4.1%. a. Calculate outright quotes for bid and ask and the number of points spread between each. b. What do you notice about the spread as quotes evolve from spot toward 6​ months?

Answer 1

Answer:

The answer is below

Explanation:

a) The spread is the difference between the ask and bid price, it is given by:

Spread = ask - bid

The outright quotes are given as:

1 - month forward:

Bid = 1.2573 + 0.0010 = 1.2583

Ask = 1.2599 + 0.0015 = 1.2614

3 - month forward:

Bid = 1.2573 + 0.0014 = 1.2587

Ask = 1.2599 + 0.0015 = 1.2621

1 - month forward:

Bid = 1.2573 + 0.0020 = 1.2593

Ask = 1.2599 + 0.0030 = 1.2629

                                                      Bid                             Ask                    Spread

1 - month forward:                         1.2583                      1.2614                 0.0031

3 - month forward:                        1.2587                      1.2621                 0.0034

6 - month forward:                        1.2593                     1.2629                 0.0036

b) The spread widen as it spot moves to 6 - month, this can lead to a thinner trading volume.