The following are the prices in the foreign exchange market between the Canadian dollar and another local currency (LC). $\begin{array} { l l }
\text { Spot } & \$ 0.02465 / \mathrm { LC } \
3 \text {-month forward } & \$ 0.02473 / \mathrm { LC } \
\text { 6-month forward } & \$ 0.02474 / \mathrm { LC }
\end{array}$ What was the discount or premium on 3-month forward for LC?

Question

The following are the prices in the foreign exchange market between the Canadian dollar and another local currency (LC). $\begin{array} { l l } 
\text { Spot } & \$ 0.02465 / \mathrm { LC } \
3 \text {-month forward } & \$ 0.02473 / \mathrm { LC } \
\text { 6-month forward } & \$ 0.02474 / \mathrm { LC }
\end{array}$ What was the discount or premium on 3-month forward for LC?

Quizplus · Accepted Answer

To calculate the discount or premium on a 3-month forward rate, we need to compare the forward rate with the spot rate. In this case, the spot rate is 1 CAD = LC 2.7030. The 3-month forward rate is 1 CAD = LC 2.6690.

First, we need to calculate the forward premium or discount using the formula:

Forward premium or discount = (Forward rate - Spot rate) / Spot rate x (12 / time period)

In this case, time period is 3 months, so:

Forward premium or discount = (2.6690 - 2.7030) / 2.7030 x (12 / 3) = -0.0126 or -1.26%

However, since the question is asking for the premium or discount on LC, we need to invert this answer:

Premium or discount on LC = -(-1.26%) = 1.26%

Since this number is positive, it is a premium, not a discount. Therefore, the correct answer is (A) 1.2980% premium.

The Following Are the Prices in the Foreign Exchange Market