While observing figures of forward quotation, it is clear that pound sterling is at discount
in the forward market since points corresponding to the bid price are higher than those
corresponding to the ask price. Therefore, the forward points will be subtracted from the
spot rate figures. Thus, outright rates are:
Spot I-month 3 - months 6 - months
Bid price (Rs) 55, 2200 55, 2160 55, 2150 55, 2145
Ask Price (Rs) 55, 2235 55, 2205 55, 2200 55, 2193
Spread (Rs) 0.0035 0.0045 0.0050 0.0048
© Rupee Rate of Deutschmark
Figures as given indicate that 1-month forward DM is at discount whereas 3-months and
6 - months forward rates are at premium. So, for 1-month forward corresponding points
will be subtracted from outright spot rates while points corresponding to 3-months and 6-
months forward will be added. Thus, outright rates are:
Spot I-month 3 - months 6 - months
Bid price (Rs) 23, 9000 23, 8970 23, 9040 23, 9045
Ask Price (Rs) 23, 9030 23, 9005 23, 9090 23, 9095
Spread (Rs) 0.0030 0.0035 0.0050 0.0050
Illustration
Problem 3
Given the following data:
Spot rate: Rs.350020 = $ 1
6 - months forward rate: Rs.35, 9010 = $.1
Annualized interest rate on 6-months rupee: 12 percent
Annualized interest rate on 6-months dollar: 7 percent
Work out the arbitrage possibilities.