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Transcript
FORWARD DISCOUNTS AND PREMIUMS Consider the relationship between forward and spot rates: ðð â ðð ð¹ð ð â ðð ð = ðð ð Ï 1 + ðð Ï where ð¹ð ð = Forward rate ðð ð = Spot rate ðð = Domestic interest rate ðð = Foreign interest rate Ï = Time (in years) This means that any premium or discount is a function of the interest rates (domestic, ðð , and foreign, ðð ) and time, Ï. Copyright © 2014 CFA Institute Example Suppose that the AUD/USD spot rate is 0.8808 and that the one-month forward rate is 0.8789. Therefore, ⢠ð¹ð ð = 0.8789, ⢠ðð ð = 0.8808, and â¢ Ï = 30/360. There is a forward discount of 0.8808 â 0.8789 = â 0.0019 or 19 pips, so ðð < ðð . 13
