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Basic Question 13 of 20
Suppose the spot exchange rate is $2/£. The forward exchange rate is $1.9/£. Which of the following is true?
B. The £ is selling at a premium.
C. The £ is selling at a discount.
A. The U.S. interest rates are lower.
B. The £ is selling at a premium.
C. The £ is selling at a discount.
User Contributed Comments 14
| User | Comment |
|---|---|
| Tukker | spot: 1 USD costs 2 GBP fwd : 1 USD costs only 1.9 GBP |
| epalumbo | Other way around: spot 1GBP costs $2 fwd 1GPP costs $1.90 |
| shiva5555 | Isn't this a premium then since it costs more? |
| Beret | A forward premium (discount) is the proportion by which a country's forward exchange rate exceeds (falls below) the spot rate. |
| Creep | Good Question... |
| business | Why not US interest are lower. using Covered interest parity ie change in interest rates = forward premium/ discount. In this case £ depreciated and hence UK interest are higher thatn US i.e US interest lower |
| kondagadu | why not A? Dollar is trading at a discount , doesn't that mean the interest rates are lower? |
| kondagadu | sorry dollar is trading at a "premium" , the answer should be A and C ??? |
| Shaan23 | I had A and C as well |
| merbpr | Yes, interest rates in the USD should be lower but question is related to currencies, not interests. |
| Kevdharr | Merbpr, the question isn't strictly asking if its selling at a premium or a discount . It is asking "which is true". Both A and C are true so they should both be the right answer. |
| gregsob2 | A might be true, and might be false. Interest rates are determined by many factors, including currency exchange rates. |
| sargis | The question doesn't say if the covered interest parity holds, so A is not true |
| davidt876 | espect sargis |
I used your notes and passed ... highly recommended!
Lauren
Learning Outcome Statements
explain spot and forward rates and calculate the forward premium/discount for a given currency;
calculate the mark-to-market value of a forward contract;
CFA® 2025 Level II Curriculum, Volume 1, Module 8.