Question

Suppose the selling price of one-month forward British pounds is $1.5137 per pound, and the spot price is $1.5139 per pound. Therefore, the UK pound is at a__________ against the U.S. dollar, because it is worth_________ in the One-month forward market than in the spot market.

Answer 1

Therefore, the UK pound is at a discount against the U.S. dollar, because it is worth less in the One-month forward market than in the spot market.

Step-by-step explanation:

Given:

Selling price = $1.5137

Spot price = $1.5139

We'll calculate how much pound is worth in the forward market.

We'll use the formula:

(selling - spot price )/spot price * 12/months of contract

`= (1.5317 - 1.5319)/(1.5319) * (12)/(1)`

`= (-0.0002)/(1.5319) * 12`

= -0.0015853

Therefore, the UK pound is at a discount against the U.S. dollar, because it is worth less in the One-month forward market than in the spot market.