Question

Explain the meaning of the forward discount of the $ relative to Euro. If the forward discount of the $ relative to Euro is 5%, does this mean that the forward premium of the Euro relative to the dollar is 5%? Why or why not?

What is a put on the USD? How do firms use a put option?

Answer 1

In foreign exchange, the concept of forward discount describes a situation in which the domestic spot future rate is trading at a discount than the current domestic spot rate. Thus forward discount of $ relative to euro here refers that the dollar spot futre rate in relation to Euro is trading at a discount than current spot rate.

Thus if current $/€ = 1.24 dollars

After 5% discount, Future $/€ = 1.31 dollars

thus in future market, dollar is depreciating in relation to euro

A put on the USD means the underlying asset for the put option is USD. Firms use put option to hedge their foreign exchange exposure on international transactions.