Question 16.3: Computing the Percent-Per-Annum Discount Calculate the annua...

STEP 1: Formulate a Solution Strategy

First, we have to identify F (the 3-month forward rate), S (the spot rate), and n (the number of months on the forward contract):

F = 1.5344, S = 1.5350, n = 3 months

Next, because S is greater than F, we compute the annualized percentage discount using equation (16-2):

premium (F > S) or discount (S > F)  (16-2)

$\frac{F – S}{ S} \times \frac{12}{ n} \times 100$ = Annualized percentage

`

STEP 2: Crunch the Numbers

When we substitute into the equation, we get

Annualized percentage =$\frac{1.5344 – 1.5350}{ 1.5350} \times \frac{12  months}{3  months} \times 100$= -0.1564%

STEP 3: Analyze Your Results

The percent-per-annum premium is negative on the 90-day pound at -0.1564%