Question

Assume the spot rate of a currency is $.37 and the 90-day forward rate is $.36. The forward rate of this currency exhibits a ____ of ____ on an annualized basis. Question 2 options: premium; 11.11% discount; 11.11% discount; 10.81% premium; 10.81%

Answer 1

discount , 10.81%

Step-by-step explanation:

Given : Spot Rate of the currency = $0.37

90 day Forward Rate = $0.36

A premium or a discount on a currency is given by the following equation:

=
`(FR\ -\ SR)/(SR) * (365\ days)/(Forward\ Days) *100`

wherein, FR = Forward Rate of a currency

SR = Spot Rate of a currency

Forward days= Forward period

In the given case, premium or discount can be calculated, by putting the values in the above equation. We have,

=
`(.36\ -\ .37)/(.37) * (365\ days)/(90 Days) *100`

= - 10.81 %

the negative sign denotes a forward discount