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Using the table below, calculate the one three and six-month forward premium or discount for the UK pound versus the US dolla
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Answer #1

Solution:

Current Spot rate = $1.4402 / Pound

1- Month forward = $1.4403 / Pound

Premium = ($1.4403 - $1.4402 ) / $1.4402 = 0.00694%

Annual premium rate = 0.00694% * 12 = 0.083%

Current Spot rate = $1.4402 / Pound

3- Month forward = $1.4407 / Pound

Premium = ($1.4407 - $1.4402 ) / $1.4402 = 0.035%

Annual premium rate = 0.035% * 4 = 0.14%

Current Spot rate = $1.4402 / Pound

6- Month forward = $1.4416 / Pound

Premium = ($1.4416 - $1.4402 ) / $1.4402 = 0.097%

Annual premium rate = 0.097% * 2 = 0.194%

Interpretation of the premium : We can see that the premium is higher as the maturity date of the forward is higher.

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