Question

Suppose the spot rate and forward rate for the British pound are $1.25/₤ and $1.2/₤ respectively....

Suppose the spot rate and forward rate for the British pound are $1.25/₤ and $1.2/₤ respectively. Assume the forward pound is selling at an 8% (annualized) discount, what is the number of days of the forward contract?

a. 60 days b. 90 days c. 180 days d. 30 days

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Answer #1
Given,
Spot rate $1.25/GBP
Forward rate $1.2/GBP
Forward discount on GBP 8%
We know,
Annualised forward discount on GBP= ((Forward rate-Spot rate)/Spot rate)*100*(360/number of days of forward contract)
-8=((1.2-1.25)/1.25)*100*(360/number of days of forward contract)
Therefore by solving,
Number of days of forward contract= 180 days
* assuming number of days in a year=360 days
Answer: Option C
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