The following are the prices in the foreign exchange market between the U.S. dollar and another local currency (LC). 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 U.S. dollar and another local currency (LC).  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, we need to compare the 3-month forward rate with the spot rate. In this case, the spot rate is 1 USD = 7.7869 LC. The 3-month forward rate is 1 USD = 7.8331 LC.

To calculate the premium or discount, we use the formula: (3-month forward rate - spot rate) / spot rate x (12/3)

Substituting the values, we get: 
(7.8331 - 7.7869) / 7.7869 x 4 
= 0.0462 / 7.7869 x 4 
= 0.00594 or 0.594%

Since the 3-month forward rate is higher than the spot rate, there is a premium on the 3-month forward for LC. Hence, the correct answer is A) 0.643% premium.

The Following Are the Prices in the Foreign Exchange Market