koba

Forward discount = 1.25% means
(F - S) / S = -1.25%
or rearrange above gives you: F / S = 98.75% (100% - 1.25%)
obviously because this is a discount, this % should be
Remember your formula:
F / S = (1 + Rc) / (1 + Rb)
Where F and S quoted as Base:Counter (peso to baht, so peso = base)
Rc = interest rate of “counter”
Rb = interest rate of “base”
so 98.75% = (1+3%) / (1 + Rb)
Rb = 4.30%
the above was the EXACT calculation. The approximation is the following:
forward differential = interest rate differential
-1.25% = Rcounter - Rbase (once again Rcounter is baht because we’re given “peso to bach, i.e., Peso:Baht)
-1.25% = 3% - Rbase
Rbase = 4.25%