Annualized percentage forward premium for the dollar

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Reference no: EM131090477

A forward premium for a given currency (say the nominal bilateral exchange rate value of the dollar where S = 80 yen/1 dollar = 80) occurs when the value of the currency as given by the forward spot rate appreciates such as S = 85 yen/1 dollar = 85. If a currency such as the dollar has a lower forward spot rate where S = 75, it depreciates and is at a forward discount. If Fn = 85 is the forward spot rate for yen/1 dollar n months from now and S = 80 is the current spot rate of yen/1 dollar, then the dollar is at a forward premium while the yen is at a forward discount. The percentage change is the same formula but it can be converted to an annualized percentage change by using the formula (Fn - S)/S x (12/n) x 100. If Fn = 81 yen/dollar = 81, S = 79, and n = 3 months, what is the annualized percentage forward premium for the dollar? The annualized percentage forward discount for the yen?

Reference no: EM131090477

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