Question

The spot rate for the Singapore dollar is $.588. The 30-day forward rate is $.590. The forward rate contains an annualized ____ of ____ percent. a. ​discount; -4.07 b. ​premium; 4.07 c. ​discount; -4.08 d. ​premium; 4.08 e. ​premium; 3.40

Answer 1

Solution:

The formula for calculating the annualized forward premium / discount is

= [ ( Forward rate – Spot rate ) / Spot rate ] * ( 360 / No. of days of forward ) * 100

As per the information given in the question we have

Forward rate of Singapore Dollar= $ 0.590      ;   Spot rate of Singapore Dollar = $ 0.588   ;

No. of days of the forward = 30

Applying the above values in the formula we have

= [ ( 0.590 – 0.588 ) / 0.588 ] * ( 360 / 30 ) * 100

= [ 0.002 / 0.588 ] * 12 * 100

= 0.003401 * 12 * 100

= 4.081633 %

= 4.08 % ( when rounded off to two decimal places )

Since the solution is positive the forward rate is at a premium.

Thus the forward rate contains an annualized premium of 4.08 percent .

Thus the solution is Option d. Premium ; 4.08