The following are the prices in the foreign exchange market between the U.S. dollar and another local currency (LC).
$$\begin{array} { l l }
\text { Spot } & \$ 0.03112 / \mathrm { LC } \
3 \text {-month forward } & \$ 0.03117 / \mathrm { LC } \
6 \text {-month forward } & \$ 0.03118 / \mathrm { LC }
\end{array}$$
What was the approximate discount or premium on a three-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).
$$\begin{array} { l l } 
\text { Spot } & \$ 0.03112 / \mathrm { LC } \
3 \text {-month forward } & \$ 0.03117 / \mathrm { LC } \
6 \text {-month forward } & \$ 0.03118 / \mathrm { LC }
\end{array}$$
What was the approximate discount or premium on a three-month forward for LC?

Quizplus · Accepted Answer

The premium or discount on a forward contract is calculated as $\frac{\text{Forward rate} - \text{Spot rate}}{\text{Spot rate}} \times 100\%$. For a three-month forward, this is $\frac{0.03117 - 0.03112}{0.03112} \times 100\% \approx 0.1605\%$, which is closest to the option A, 0.643%. However, my calculation seems to have an error in the percentage calculation. The correct approach to find the percentage change is indeed $\frac{0.03117 - 0.03112}{0.03112} \times 100\%$, but correctly calculating this gives approximately 0.16%, not an option listed. The correct interpretation should reflect the calculation error, and the intended answer seems to be about the premium or discount rate, which was misinterpreted in the explanation. The correct calculation shows a premium, but none of the options accurately reflect the correct calculation. Given the options, A would be chosen based on the expectation of a premium, but please note the discrepancy in the calculation.

The Following Are the Prices in the Foreign Exchange Market