Asked by Javier Lopez on Apr 30, 2024
Verified
If the spot rate for Swiss francs is $.6658/franc and the six month forward rate is $.6637/franc, the market is indicating that the Swiss franc is expected to:
A) strengthen relative to the dollar.
B) weaken relative to the European currency.
C) lose value relative to the dollar over the next 6 months.
D) gain value relative to the dollar over the next 6 months.
Swiss Francs
Swiss Francs are the currency of Switzerland, known for their stability and being a safe-haven currency in times of financial market volatility.
Forward Rate
The future interest rate agreed upon in a forward contract, determining the cost of borrowing or lending for future transactions.
Spot Rate
The current market price of a commodity, currency, or security that is available for immediate settlement.
- Clarify the underlying concept of currency valuation, emphasizing on its determinants such as the interplay of demand and supply, and essential economic indicators.
- Analyze the effects of currency strength or weakness on international trade dynamics.
Verified Answer
KH
Kaila HollandMay 07, 2024
Final Answer :
C
Explanation :
The forward rate being lower than the spot rate ($.6637/franc vs. $.6658/franc) indicates that the Swiss franc is expected to lose value relative to the dollar over the next 6 months.
Learning Objectives
- Clarify the underlying concept of currency valuation, emphasizing on its determinants such as the interplay of demand and supply, and essential economic indicators.
- Analyze the effects of currency strength or weakness on international trade dynamics.