The one-year forward rate of the British pound is quoted at $1.60, and the spot rate of the British pound is quoted at $1.63. The forward ____ is ____ percent.
A) discount; 1.9
B) discount; 1.8
C) premium; 1.9
D) premium; 1.8

Question

Quizplus · Accepted Answer

Forward = Spot * (1+rf)^t
1.60 = 1.63 * (1+rf)^1
(1+rf) = 0.9816
rf = -0.0184 or -1.84%
Since the forward is less than the spot, the forward is at a discount. Therefore, the answer is (B) discount; 1.8%.

The One-Year Forward Rate of the British Pound Is Quoted