The 180-day forward rate for the euro is $1.34, while the current spot rate of the euro is $1.29. What is the annualized forward premium or discount of the euro?

Question

The 180-day forward rate for the euro is $1.34, while the current spot rate of the euro is $1.29. What is the annualized forward premium or discount of the euro?​

Quizplus · Accepted Answer

To calculate the annualized forward premium or discount of the euro, we will use the following formula:

[(Forward Rate - Spot Rate)/Spot Rate] x (360/number of days in the forward contract)

So, [(1.34-1.29)/1.29] x (360/180) = 0.0775 or 7.75%

Since the forward rate is higher than the spot rate, we have a forward premium. Therefore, the best choice is C, which represents a 7.75 percent premium for the euro.

The 180-Day Forward Rate for the Euro Is $1