Suppose the spot rate and forward rate for the British pound are $1.4248 and $1.4179 respectively.Assume the forward pound is selling at a 1.94% annualized discount,what is the number of days of the forward contract?

Question

Quizplus · Accepted Answer

First, we need to calculate the forward price using the formula:
Forward Price = Spot Price x (1 + Interest Rate Differential)

Here, we are given that the forward pound is selling at a 1.94% annualized discount. This means that the interest rate differential is 1.94%.

So, Forward Price = $1.4248 x (1 + 1.94%) = $1.4523

Now, we can calculate the number of days in the forward contract using the formula:
Number of Days = (360 x (Forward Points / Spot)) / (Interest Rate Differential + 1)

Here, Forward Points = Spot Price - Forward Price = $1.4248 - $1.4523 = -0.0275
Spot = $1.4248 
Interest Rate Differential = 1.94%

Substituting these values, we get:
Number of Days = (360 x (-0.0275 / 1.4248)) / (0.0194 + 1) = 89.80

Rounding off, we get the answer as 90 days. Therefore, the best choice is C.

Suppose the Spot Rate and Forward Rate for the British