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Basic Question 8 of 14
The spot rate $:KRW (Korea Won) = 833. The 3-month forward rate is $:KRW = 863. What is the KRW's forward premium (or discount) on the dollar, expressed as an annual rate?
B. 4% premium
C. 14% discount
A. 4% discount
B. 4% premium
C. 14% discount
User Contributed Comments 13
| User | Comment |
|---|---|
| isida | how can this be a discount when the forward rate is higher than the spot rate? |
| jayson | the question asks for KRW's discount, not the dollar's. |
| AlexYuen | Calculate FD/P, then check which direction qn is asking for. Negate where required |
| ljamieson | $ at 30 KRY premium. KRY at 4*30/833 = 14.4% discount? Or is it 4*30/863 = 13.9%? |
| Allen88 | It's 30/833 because we're trying to find how much the premium (discount) it is relative to the spot rate. And it makes sense the KRW's forward is a discount. Think of it this way, you can buy more KRW with the forward rate than the spot rate. Therefore, the KRW forward rate is in depreciated terms compared to the spot rate. Which means its KRW forward discount. |
| safash | why multiplied by 4 |
| Creep | Because it's a 3 month forward rate, it needs to be multiplied by 4 to be annualized... hope this helps. |
| tichas | 3 months is quarter of a yr, if its 6 month then we multiply by 2 . |
| crazyman | Why isn't it compounded (0.964^4 = 0.8636 -->13.64% discount) |
| davcer | its a premium for the usd but discount for the KRW |
| ldfrench | Does anyone have a piece of rope? Preferably 6 feet or longer? |
| maryprz14 | isida; $:W is 833-863 means that $1 can buy 833 W now. Future; $1 can buy 863 instead. Means that $ is going to strength against W >>>>>> W is on Discount against $ (in 3 months from now) |
| momoetto | 833*(1+x)=863 => x=0.036; 0.036*4=0.14 =>14% Can i calculate like this? |
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Learning Outcome Statements
explain the arbitrage relationship between spot and forward exchange rates and interest rates, calculate a forward rate using points or in percentage terms, and interpret a forward discount or premium
CFA® 2024 Level I Curriculum, Volume 1, Module 8.