Svenska BK (Swedish bank) enters into a forward contract with a customer to buy Krona (Swedish currency) for $1.25 (US currency) in six months time. After 6 months have gone by the spot exchange rate is now $1.36/Krona. The company asks you (Svenska BK) if it can roll the contract forward an additional 8 months rather than settle now (at the original maturity date). Assume the interest rates in Krona and USDs are constant at 12% and 6% respectively (with continuous compounding) for all of your calculations.
A) What is the new “fair” forward price for delivery in eight months (as requested by the customer)?
B) If Svenska BK charges a rollover fee of $.05 per Krona what is the “all in” price that Svenska will quote their customer? By “all in” price we are to assume that the rollover fee is incorporated into the price quote.