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?

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raphealnwobi raphealnwobi · Answer 1 · 2020-10-07T07:05:58+02:00

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.