Question

Consider the following spot and forward rate quotations for the Swiss franc. S(/SFr) = 0.85 F1(/SFr) = 0.86 F2(/SFr) = 0.87 F3(/SFr) = 0.88 Which of the following is true?

1) S(/SFr) is greater than F3(/SFr)
2) F1(/SFr) is greater than F2(/SFr)
3) F2(/SFr) is greater than S(/SFr)
4) F3(/SFr) is greater than F1(/SFr)

Answer 1

Upon comparing the spot rate with the forward rates for the Swiss franc, we find that the correct statements are that F2(/SFr) is greater than S(/SFr), and F3(/SFr) is greater than F1(/SFr). The spot rate (S(/SFr)) is less than all forward rates, and each forward rate is higher than the one for a shorter term.

Step-by-step explanation:

The spot rate S(/SFr) and the forward rates F1(/SFr), F2(/SFr), and F3(/SFr) represent the current and future exchange rates for the Swiss franc against another currency (presumably the U.S. dollar in this context). To evaluate the given statements, we compare these rates directly:

• S(/SFr) = 0.85 is the spot rate.
• F1(/SFr) = 0.86 is the 1-year forward rate.
• F2(/SFr) = 0.87 is the 2-year forward rate.
• F3(/SFr) = 0.88 is the 3-year forward rate.

Let's examine each statement:

1. S(/SFr) is greater than F3(/SFr) - This statement is false; the spot rate (0.85) is less than the 3-year forward rate (0.88).
2. F1(/SFr) is greater than F2(/SFr) - This is false; the 1-year forward rate (0.86) is less than the 2-year forward rate (0.87).
3. F2(/SFr) is greater than S(/SFr) - This is true; the 2-year forward rate (0.87) is greater than the spot rate (0.85).
4. F3(/SFr) is greater than F1(/SFr) - This is true; the 3-year forward rate (0.88) is greater than the 1-year forward rate (0.86).

Thus, the correct statements from the ones listed are:

• F2(/SFr) is greater than S(/SFr)
• F3(/SFr) is greater than F1(/SFr)