Consider the following spot and forward rate quotations for the Swiss franc? $$\begin{aligned}
S ( \$ / S F r ) & = 0.85 \
F _ { 1 } ( \$ / S F r ) & = 0.86 \
F _ { 2 } ( \$ / S F r ) & = 0.87 \
F _ { 3 } ( \$ / S F r ) & = 0.88
\end{aligned}$$ Which of the following is true:

Question

Quizplus · Accepted Answer

The spot rate is the current exchange rate for immediate delivery or spot delivery. In this case, it is given as $0.85/	ext{SF}$, which means that currently one Swiss franc is worth $0.85.
The forward rate is the exchange rate for delivery and payment at a future date. In this case, we are given three forward rates: $F_1=0.86$, $F_2=0.87$, $F_3=0.88$, which means that if we want to buy Swiss francs at some point in the future, we can agree on the exchange rate now and execute the transaction on the specified date. 
The forward rate can be at a discount or at a premium. If the forward rate is lower than the spot rate, it is at a discount, which means that the domestic currency is expected to appreciate relative to the foreign currency. If the forward rate is higher than the spot rate, it is at a premium, which means that the domestic currency is expected to depreciate relative to the foreign currency.
In this case, the current spot rate is $0.85/	ext{SF}$, and the three forward rates are higher, which means that the Swiss franc is trading at a forward premium. Therefore, the answer is (D) The Swiss franc is trading at a forward premium.

Consider the Following Spot and Forward Rate Quotations for the Swiss