In one sentence or two explain the meaning of the forward discount of the $ relative to Euro. If the forward discount of the $ relative to Euro is 5%, does this mean that the forward premium of the Euro relative to the dollar is 5%? Why or why not?
The Government imposed a 30% tariffs on Chinese solar panel imports. Assuming that this policy is extended to all imports from China, what will happen to the $/RMB exchange rate (all other things being equal)
1) Forward discount of USD relative to EUR means that the value of dollar is likely to depreciate going ahead relative to the value of euro. A forward discount of 5% for USD to EUR is approximately equal to a forward premium of 5% for EUR to USD. It is not exactly equal because 1/(1 – 5%) – 1 = 5.26%, i.e 5% discount is equal to 5.26% premium for other currency.
2) With a tariff on imports from China, the value of all Chinese products in the US will get expensive. Hence, US consumers are likely to demand less Chinese products, which will lead to lower demand for RMB by US importers. This will lead to stronger dollar and cheaper yuan.