What was the annualized forward premium on the pound if the spot rate on May 6,2011 was £0.6102/$ and the 180 day forward rate was £0.5836/$?

Question

Quizplus · Accepted Answer

The formula for calculating the annualized forward premium is:

[(Forward Rate - Spot Rate)/Spot Rate] x (365/number of days to maturity)

[(£0.5836 - £0.6102)/£0.6102] x (365/180) = -0.0459

Note that the answer is negative because the forward rate is lower than the spot rate, indicating a discount on the pound.

To convert the decimal into a percentage, multiply by 100:

-0.0459 x 100 = -4.59%

Since the question asks for the annualized forward premium, we need to double the result:

-4.59% x 2 = -9.18%

However, the answer choices are given in positive percentages, so we need to take the absolute value:

|-9.18%| = 9.18%

Therefore, the annualized forward premium on the pound is 9.18%, which corresponds to answer choice B). However, note that answer choice A) is also correct because it is twice the absolute value of the result we obtained.

What Was the Annualized Forward Premium on the Pound If