Forward premiums and discounts are quoted in annualized form because:
A) The IMF mandates this practice.
B) Unlike options contracts, forward contracts are always one year in length.
C) Purchases are balanced every fiscal year.
D) Comparisons to interest rate returns are easier.

Question

Quizplus · Accepted Answer

Forward premiums and discounts are calculated based on the difference between the spot price and the forward price, and are quoted in an annualized form to compare them to interest rate returns. This allows investors to determine whether it is more advantageous to purchase the asset now (at the spot price) or to enter into a forward contract and purchase the asset at a future date (at the forward price). The other choices (A, B, and C) are not relevant to the calculation and quoting of forward premiums and discounts.

Forward Premiums and Discounts Are Quoted in Annualized Form Because