Computing the Percent-Per-Annum Discount Calculate the annualized percentage discount on the 90-day or 3-month British pound given a 3-month forward rate of 1.5344 and a spot rate of 1.5350.

Question

Computing the Percent-Per-Annum Discount

Calculate the annualized percentage discount on the 90-day or 3-month British pound given a 3-month forward rate of 1.5344 and a spot rate of 1.5350.

Accepted Answer

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)

[latex] \frac{F - S}{ S} imes \frac{12}{ n} imes 100 [/latex] = Annualized percentage

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STEP 2: Crunch the Numbers

When we substitute into the equation, we get

Annualized percentage =[latex] \frac{1.5344 - 1.5350}{ 1.5350} imes \frac{12 months}{3 months} imes 100 [/latex]= -0.1564%

STEP 3: Analyze Your Results

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

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