Question

10. The following are the exchange rates observed at New York market:                               &nbs

10. The following are the exchange rates observed at New York market:

                                    Spot                 1-Month                       3-Month                       1-Year

UK (£)                   $1.4544             $1.4539                       $1.4535                        $1.4533

      Euro (€)                  $1.2231             $1.2239                       $1.2244                        $1.2247

a.         What is the forward discount or premium on UK (£) and Euro (€) at one month, 3 months, and 12 months?    Calculate and list below.       

b.         Is UK (£) at forward premium or discount against $? How about €?           

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Answer #1

Solution:

Part A ) In order to calculate forward premium or discount we have to divide forward rate by spot rate then subtract 1 to get the discount or premium %

Forward premium and discount is calculated below

Part B )

The pound is at discount against the dollar as the forward rate of the pound is lower than the spot rate

The Euro is at premium against the dollar as the forward rate of the euro is higher than the spot rate

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