Question

What are spot rates and forward rates? Sweet Dog Manufacturing, a U.S. company, produces and exports industrial machinery overseas. It recently made a sale to a Japanese manufacturing firm for ¥625 million, but the Japanese firm has 60 days before it must make the payment to Sweet Dog Manufacturing The spot exchange rate is ¥128.75 per dollar, and the 60 -day forward rate is ¥133.45 per dollar. Is the yen selling at a premium or at a discount in the forward market relative to the U.S. dollar? In the forward market, the yen is trading at a premium. The yen is trading at a discount in the forward market.

Answer 1

Spot rates refer to the current exchange rate, while forward rates are agreed upon today for a future delivery. The yen is selling at a premium in the forward market relative to the U.S. dollar.

Step-by-step explanation:

In the context of foreign exchange markets, spot rates refer to the current exchange rate between two currencies. It represents the rate at which a currency can be bought or sold for immediate delivery and payment.

On the other hand, forward rates are the exchange rates agreed upon today for a future delivery and payment of a currency. They allow companies and individuals to hedge against currency fluctuations by locking in a specific exchange rate for a future transaction.

In the given scenario, the spot exchange rate is ¥128.75 per dollar, while the 60-day forward rate is ¥133.45 per dollar. Since the forward rate is higher than the spot rate, it means that the yen is selling at a premium in the forward market relative to the U.S. dollar.