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If the New Zealand Dollar (NZD) is currently priced at $0.735 (US Dollars), and the 6-month...

  1. If the New Zealand Dollar (NZD) is currently priced at $0.735 (US Dollars), and the 6-month forward rate for the NZD is $0.7146, determine the amount of the forward premium/forward discount in annualized percentage terms. Assume 360 days in the year and 182 days in 6 months.. Make sure you state whether the NZD is trading at a forward premium OR a forward discount.
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Answer #1
  • Here the exchange rate is given in the format of USD / NZD. That is USD is the price and NZD is the product.
  • Here forward rate<spot rate. So product in the exchange rate ie; NZD is depreciating and USD is appreciating

Forward discount on NZD = (F-S)/S * D/360 * 100

where

F - forward rate = .7146

S - spot rate = .735

d - no. of days

Forward discount on NZD = (.7146-.735)/.735 * 182/360 * 100

= -0.0204 /.735 * 182/360 * 100

= -1.40

Negative sign indicates that NZD is trading at forward discount which is line with the assumptions we made earlier.

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