Question

The spot rate of exchange between the U.S. dollar and the euro is 1.35 (dollar/euro) and the three-month forward rate of exchange is 1.29.

Select one:

a. The euro is selling at a discount and the standard forward discount is 17.78 percent.

b. The euro is selling at a premium and the standard forward premium is 18.60 percent.

c. The euro is selling at a premium and the standard forward premium is 15.78 percent.

d. The euro is selling at a discount and the standard forward discount is 18.60 percent.

A U.S. resident purchases a $1,000 bond issued by a foreign government. The impact of this transaction on the current account is:

Select one:

a. a debit of $1,000.

b. both a debit and credit of $1,000.

c. a credit of $1,000.

d. no impact on the current account.

Answer 1

1.

The formula for forward discount or premium is

F = [(Forward rate - Spot rate) / spot rate] * (12 / n) * 100

A negative value of F means forward discount and a positive value means forward premium.

n = no. of months forward rate

F = [(1.29 - 1.35) / 1.35] * (12 / 3) * 100 = - 17.777% or - 17.78%.

The negative sign means forward discount.

So, the correct option is

a. The euro is selling at a discount and the standard forward discount is 17.78 percent.

2.

A U.S. resident purchases a $1,000 bond issued by a foreign government. The impact of this transaction on the current account is:

a. a debit of $1,000.

This is because as the U.S. resident buys a bond issued by a foreign country, it has to be included in the debit section of the current account. This is because it is considered as the outflow from the U.S..