Question

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The spot rate on the London market is £0.5525/$, while the 90-day forward rate is £0.5587/$. What is the annualized forward premium or discount on the British pound? (Round answer to 2 decimal places, e.g. 17.54%. Use 360 days for calculation.)

Forward premium or (discount)

%

Answer 1

The answer is discount on the British pound (4.44) %.

Spot rate = £0.5525/$

This means that 1$ is equivalent to £0.5525

90-day forward rate = £0.5587/$

We need to calculate annualized forward premium or discount on the British pound

We will use the formula

[(S - F) / F] * 100 * (360 days / n)

Where S is the Spot rate

F is the forward rate

n = 90 days (as given)

Therefore annualized forward premium or discount on the British pound

= [(0.5525 - 0.5587) / 0.5587] * 100 * (360 / 90)

= (- 0.0062 / 0.5587) * 100 * 4

= -0.0110971899 * 100 * 4

= - 4.44 % or (4.44)

( Rounded to two decimal places)

This means discount on British pound