Question

Using the information below to calculate the three-, and six-month forward premium or discount for US Dollar versus the British Pound using European term quotations. Assume each month has 30 days.

UK Pound                    in US$             per US$

Spot                             1.1405              .8768

1-mos forward            1.1402               .8770

3-mos forward           1.1396               .8775

6-mos forward            1.1389               .8780

Answer 1

Answer 0.003159,0.002810

In% = 3 month premium .3159% , 6 month premium .2810%

Explanation

European term

Spot rate $/£ = 1.1405

3 month forward rate $/£ = 1.1396

USD at premium /(discount) =

=Spot rate- forward rate / forward rate *12/n

=1.1405 - 1.1396/1.1396* 12/3

=0.003159 or 0.3159% for premium USD versus british pound

      Spot rate $/£ = 1.1405

6 month forward rate $/£ = 1.1389

USD at premium /(discount) =

=Spot rate- forward rate / forward rate *12/n

=1.1405 - 1.1389/1.1389* 12/6

=0.002810 or 0.2810% for premium USD versus british pound

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