Expert Answers

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:

Period   ¥/$
Bid Rate
  ¥/$
Ask Rate
spot   85.41   85.46
1 month   85.02   85.05
2 months   84.86   84.90
3 months   84.37   84.42
6 months   83.17   83.20
12 months   82.87   82.91
24 months   81.79   81.82

a. What is the mid-rate for each maturity?

b. What is the annual forward premium for all maturities?

c. Which maturities have the smallest and largest forward premiums?

Since the exchange rate quotes are indirect quotes on the dollar (¥/$), the proper forward premium calculation is: