Final answer:
To calculate the forward premium, you need the spot and forward exchange rates, which are not provided in the question. Typically, the calculation involves finding the difference between these rates, dividing by the spot rate, and then annualizing the result.
Step-by-step explanation:
To calculate the forward premium on the dollar, you would typically need the spot exchange rate and the forward exchange rate for the dollar. These rates would tell you how much more or less the currency is valued in the forward market compared to the spot market. However, as the specific spot rate and the n-month forward rate are not provided in the question, I cannot complete the calculation. But I will explain how it's generally calculated.
For instance, if the spot rate is 1.2500 USD/EUR and the 12-month forward rate is 1.2600 USD/EUR, the forward premium would be calculated as follows:
- Calculate the difference between the forward rate and the spot rate: 1.2600 - 1.2500 = 0.0100.
- This difference is then divided by the spot rate: 0.0100 / 1.2500 = 0.008.
- To annualize this premium, divide by the fraction of the year (based on a 360-day year): 0.008 / (12/360) = 0.24 or 24% annualized forward premium.
Note that an understanding of the forward premium is crucial as it reflects expectations on the future movement of a currency's value and is especially important in international trade and finance.