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Currency Forward Premium or Discount Calculation?
Forward Rate: $1.60/1 pound
Spot: $1.75/1 pound
The exact forward premium/discount for the pound against the $ is 1.6-1.75/1.75 = -8.57% or a forward discount of -8.57% of the pound against the dollar.
Why is it then, that when you convert the rates to pound/$, the discount changes??
1/1.6 = .625 pound/1$ Forward Rate
1/1.75 = .57143 pound/1$ Spot Rate
Forward premium/discount calculation = .625 - .57143 / .57143 = - 9.374% discount
What causes the difference between these answers? |
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