The $/£spot exchange rate is $1.60/£and the 180-day forward exchange rate is $1.59/£. Is $ trading...

The $/£spot exchange rate is $1.60/£and the 180-day forward exchange rate is $1.59/£. Is $ trading at forward premium or forward discount relative to £? What about £? Calculate the forward premium (discount) for $ and £.

Solutions

Expert Solution

Dollar is trading at a forward premium in this case where as euros are trading at a forward discount.

Forward premium of dollar= (forward exchange rate - spot Exchange rate)/spot Exchange rate

= ((1/1.59)-(1/1.6))/(1/1.6)

= (.6289-.625)/.625

=.6289% premium

Forward discount of Euro

= (1.6-1.59)/1.6

=- .6250% discount

jeff jeffy answered 2 years ago

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