Question

Given that the spot rate is 1.5 euros per pound and the forward euro-pound exchange rate is 1.575 euros per pound calculate the forward premium discDunt on the British pound and indicate which of the two it is. Consider a Dutch investor with 1 000 euros to pace in a bank deposit in either the Netherlands or Great Britain. The one-year interest rate on bank deposits is 2% in Britain and 4.04% in the Netherlands. The one year forward euro-pound exchange rate is 1.575 euros per pound, and the spot rate is 1.5 curos per pound. O 4.7%; premium O 4.7%; discount 5%, premium 5%, discount

Answer 1

(1.575-1.5)/1.5*100=5%

As we would be buying more Euros per Pound

When forward exchange rate is less than spot rate then it is said to be forward rate discount here Forward rate is 1.575 euros per pound and spot rate is 1.5 euros per pound

hence it is the premium.

Option C is correct