Page 35 - FINAL CFA I SLIDES JUNE 2019 DAY 6
P. 35
Session Unit 5:
20. Currency Exchange Rates
LOS 20.g: Calculate and interpret a forward discount or premium, p.161
The forward discount or premium for the base currency is the percentage difference
between the forward price and the spot price.
Consider:
• USD/EUR spot = $1.312
• USD/EUR 90-day forward = $1.320
The (90-day) forward P or D on EUR = forward/spot – 1 = 1.320/1.312 – 1 = 0.609%.
Because this is positive, it is interpreted as a forward premium on the euro of 0.609% re
EURO expected to appreciate versus USD/USD expected to depreciate versus EURO!.
Otherwise, a negative would be a FD for the EURO relative to the USD.
Since we have the forward rate for 3 months, we could annualize the discount simply by
multiplying by (12/3=) 4.
