The spot rate on the London market is £0.5510/$, while the 90-day forward rate is £0.5586/$. What is the annualized forward premium or discount on the British pound?

The spot rate on the London market is £0.5510/$, while the 90-day forward rate is £0.5586/$. 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) Entry field with incorrect answer 10.01 %

Solutions

Expert Solution

Since, 90 days forward rate is GBP 0.5586/$ is greater than spot rate on the london market of GBP 0.5510/$ denotes, GBP depreciate against $.

1 GBP equal to $1.8149 on Spot rate (1/0.551=1.8149)

1 GBP equal to $1.7902 on forward rate (1/0.5586= 1.7902)

Since, forward rate is less than the spot rate $1.7902 < $1.8149 the British Pound is trading at forward discount.

Forward discount P.a. = Forward Rate - Spot Rate X 360/ N X 100

Spot rate

Where N= Number of days.

Forward discount P.a. = 0.5586 – 0.5510 X 360 days/ 90 days X 100 = 5.52% P.a

0.5510

Therefore, annualized forward discount on Bristish Pound is 5.52%

jeff jeffy answered 2 years ago

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