708 Part Eight Risk Management
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indirect quote for the Brazilian real shows that you could buy 2.5218 reals for $1. This is often
written as BRL2.5218/USD1.
A direct exchange rate quote states how many dollars you can buy for one unit of for-
eign currency. The euro and the British pound sterling are usually shown as direct quotes.^2
For example, Table 27.1 shows that GBP1 is equivalent to USD1.5678 or, more concisely,
USD1.5678/GBP1. If £1 buys $1.5678, then $1 must buy 1/1.5678 = GBP.6378. Thus the
indirect quote for the pound is GBP.6378/USD1.^3
The exchange rates in the second column of Table 27.1 are the prices of currency for
immediate delivery. These are known as spot rates of exchange. The spot rate for the real is
BRL2.5218/USD1, and the spot rate for the pound is USD1.5678/GBP1.
In addition to the spot exchange market, there is a forward market. In the forward market you
buy and sell currency for future delivery. If you know that you are going to pay out or receive
foreign currency at some future date, you can insure yourself against loss by buying or selling
forward. Thus, if you need one million reals in three months, you can enter into a three-month
forward contract. The forward exchange rate on this contract is the price you agree to pay in
three months when the one million reals are delivered. If you look again at Table 27.1, you will
see that the three-month forward rate for the real is quoted at BRL2.5874/USD1. If you buy
reals for three months’ delivery, you get more reals for your dollar than if you buy them spot.
In this case the real is said to trade at a forward discount relative to the dollar, because forward
reals are cheaper than spot ones. Expressed as an annual rate, the forward discount is^44 × (^) ( __2.5218
2.5874
− 1 (^) ) = −.101, or −10.1%
Forward Rate
Abbreviation Spot Ratea 1 Month 3 Month 1 Year
Europe:
Euro EUR or € 1.2413 1.2416 1.2421 1.2463
Sweden (krona) SEK 7.4567 7.4561 7.4551 7.4433
Switzerland (franc) CHF 0.9684 0.9681 0.9673 0.9621
United Kingdom (pound) GBP or £ 1.5678 1.5674 1.5667 1.5634
Americas:
Brazil (real) BRL 2.5218 2.5449 2.5874 2.7858
Canada (dollar) CAD 1.1228 1.1236 1.1253 1.1327
Mexico (peso) MXN 13.6083 13.6375 13.6823 13.9248
Pacific/Middle East/Africa:
Australia (dollar) AUD 1.1516 1.1544 1.1593 1.1297
Hong Kong (dollar) HKD 7.7573 7.7573 7.7573 7.7573
India (rupee) INR 61.8 62.215 63.025 66.3775
Japan (yen) JPY or ¥ 117.565 117.541 117.429 116.903
South Africa (rand) ZAR 10.9308 10.9901 11.0976 11.6194
South Korea (won) KRW 1113.9 1115.5 1118 1123.2
❱ TABLE 27.1^ Spot and forward exchange rates, November 2014.
aRates show the number of units of foreign currency per U.S. dollar, except for the euro and the U.K. pound, which show the
number of U.S. dollars per unit of foreign currency.
(^3) Foreign exchange dealers usually refer to the exchange rate between pounds and dollars as cable. In Table 27.1 cable is 1.5678.
(^2) The euro is the common currency of the European Monetary Union. The 19 members of the Union are Austria, Belgium, Cyprus, Estonia, Fin-
land, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Portugal, Slovenia, Slovakia, and Spain.
(^4) Here is an occasional point of confusion. Since the quote for the real is indirect, we calculate the premium by taking the ratio of the
spot rate to the forward rate. If we use direct quotes, then we need to calculate the ratio of the forward rate to the spot rate. In the case
of the real, the forward discount with direct quotes is 4 × [(1/2.5874)/(1/2.5218) − 1] = −.101, or −10.1%.