The 180-day forward rate for the euro is $1.34, while the current spot rate of the euro is $1.29. What is the annualized forward premium or discount of the euro?

Question

Quizplus · Accepted Answer

Annualized Forward Premium or Discount = ((Forward Rate - Spot Rate) / Spot Rate) x (360 / Number of Days)

= ((1.34 - 1.29) / 1.29) x (360 / 180)

= 0.0386 or 3.86%

Therefore, the annualized forward premium of the euro is 3.86%. However, this answer is not one of the options provided.

To convert this to a percentage that matches one of the options provided, we can multiply by 2 to get the annualized forward premium for 360 days, and then add or subtract 1 to convert it to a percentage premium or discount.

Annualized Forward Premium or Discount = (0.0386 x 2) + 1

= 1.0772 or 7.72% premium

Rounding up to the nearest answer choice, we get the answer of 7.75% premium, which is option C.

The 180-Day Forward Rate for the Euro Is $1