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The €/$ spot exchange rate is €1.50/$ and the 120 day forward exchange rate is €1.45/$. The forward premium (discount) is Group of answer choices the dollar is trading at an 8% premium to the euro for delivery in 120 days. the dollar is trading at a 5% premium to the Swiss franc for delivery in 120 days. the dollar is trading at a 10% discount to the euro for delivery in 120 days. the dollar is trading at a 5% discount to the euro for delivery in 120 days.

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Anthougoidn

Answer:

The forward premium (discount) is:

the dollar is trading at a 10% discount to the euro for delivery in 120 days.

Explanation:

a) Data and Calculations:

Spot exchange rate = €1.50/$

120 day forward exchange rate = €1.45/$

When the forward rate is less than the spot rate, the means that the currency is trading at a discount in the forward market.

The formula for calculating the forward premium or discount is:

= (Forward Rate Minus Spot Rate)/Forward Rate * 360/120

= (€1.45 - €1.50)/€1.45 * 360/120

= €-0.05/€1.45 * 3

= €-0.03448 * 3 = -10.3%

b) The forward premium occurs when the forward exchange rate is higher than the spot exchange rate. The forward discount occurs when the forward exchange rate is lower than the spot exchange rate.  Forward premium or discount is normally expressed as the annualized percentage of the difference, using 360 days.

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