Question

Calculate the forward discount on the dollar (the dollar is the home currency) if the spot rate is spot rate is $1.5800/£ and the 6-month forward rate is $1.5550/£.

&A: (4 decimal places) a) Percent premium is: b) Percent forward premium is:

Answer 1

Given,

Spot rate 1£=$1.5800

6 month forward rate

1£= $1.5550

In the above, £ is depreciating currency and dollar is appreciating currency or we can say pound is at discount and dollar is at premium. since £ which is expressed in terms of $ is decreasing and if one currency is decreasing in currency quote it means other currency is increasing..

The formulae for premium/ discount in currency in % Is

=spot rate - forward rate/ forward rate * 100 *12/n

=1.5800-1.5550/1.5550*100*12/6

=3.21%

Premium in $ is 0.025 (1.5800-1.5550)