Question 21.A.3: Forward Premium (Discount) PROBLEM: Ian Chappell is plannin...
Forward Premium (Discount)
PROBLEM: Ian Chappell is planning a trip from Sydney, Australia, to visit his brother, who works in India. He plans to make the trip in six months. In preparing his budget for the trip, he finds that the spot rate for Indian rupees is Rs45.1596 per Australian dollar (A$). He also finds the six-month forward rate to be Rs42.1913/A$. What is the forward premium or discount on the Indian rupees against the Australian dollar?
APPROACH: Recognize that the Australian dollar will buy fewer Indian rupees in six months than now. This means that the Indian rupee is at a forward premium against the Australian dollar or that the Australian dollar is at a discount against the rupee. To find out how much, we use Equation 21.2.
Forward \ premium (discount) =\frac {Forward \ rate – Spot \ rate}{Spot \ rate} \times \frac {360}{n} \times 100 21.2
Using Equation 21.2, we calculate the value as:
Forward \ Discount =\frac{Rs42.1913/A\$ – Rs45.1596/A\$}{Rs45.1596/A\$}\times \frac{360}{180} \times 100 = -13.15\%Thus, the Australian dollar is at a forward discount of 13.15 percent against the Indian rupee.