Suppose that the 1-year forward rate of dollar per pound is $1.32,the current spot rate $/pound is $1.20,and the expected future spot rate $/pound is $1.40.The expected premium on the pound is:
A) -6.7%
B) 5.7%
C) 10%
D) 16.7%

Question

Quizplus · Accepted Answer

The expected premium on the pound can be calculated using the following formula:

Premium = (Forward Rate - Spot Rate) / Spot Rate x 100%

= ($1.32 - $1.20) / $1.20 x 100%

= 0.1 x 100%

= 10%

Therefore, the best choice is D) 16.7%.

Suppose That the 1-Year Forward Rate of Dollar Per Pound