Tutorial 8

Q1. (a) Examine the reasons for the use of ‘backward’ valuations.
The reason is because customers, speculators or bankers need the valuation to hedge
their immediate Forex exposure risk.

(b) Name the type of Forex quotes that require backward valuations.
Quoting FX rate for value ‘tom’ and value ‘tod’ from the spot rate (spot date) is a
‘backward’ valuation.

(c) Identify the rate that forms the basis for the computation of backward valuations.
Spot rate

(d) Explain why discounts are added to the spot rate or premium subtracted from the
spot rates to arrive at the required backward valuation.
As bid swap point > offer swap point, then it is selling at discount. As offer
swap point is impossible selling at lower rate than bid swap point, then discount
should add to the spot rate.
As bid swap point < offer swap point, then it is selling at premium, then the
premium rate should deduct to the spot rate.