Assume that the one-month forward rate is 2.02 dollars per pound and the spot rate is 2.00 dollars per pound.Calculate the annualized percentage forward premium or discount for the pound.
A) 12 percent discount
B) 12 percent premium
C) 144 percent discount
D) 144 percent premium

Question

Quizplus · Accepted Answer

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

Forward Premium/Discount = (Forward Rate - Spot Rate) / Spot Rate x (12/1)

Substituting the given values, we get:

Forward Premium/Discount = (2.02 - 2.00) / 2.00 x 12
Forward Premium/Discount = 0.02 / 2.00 x 12
Forward Premium/Discount = 0.01 or 1%

Since the forward rate is higher than the spot rate, the pound is at a forward premium. To annualize this percentage, we multiply it by 12; hence, the annualized percentage forward premium is:

Annualized Forward Premium = 1% x 12
Annualized Forward Premium = 12%

Therefore, the correct answer is B - 12 percent premium.

Assume That the One-Month Forward Rate Is 2