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Basic Question 6 of 20
The spot rate KRW/USD (Korea Won) = 833. The 3-month forward rate is KRW/USD = 863. What is the KRW's forward premium (or discount) on the dollar, expressed as an annual rate?
B. 4% premium
C. 14% discount.
A. 4% discount
B. 4% premium
C. 14% discount.
User Contributed Comments 13
| User | Comment |
|---|---|
| isida | how can this be a discount when the forward rate is higher than the spot rate? |
| jayson | the question asks for KRW's discount, not the dollar's. |
| AlexYuen | Calculate FD/P, then check which direction qn is asking for. Negate where required |
| ljamieson | $ at 30 KRY premium. KRY at 4*30/833 = 14.4% discount? Or is it 4*30/863 = 13.9%? |
| Allen88 | It's 30/833 because we're trying to find how much the premium (discount) it is relative to the spot rate. And it makes sense the KRW's forward is a discount. Think of it this way, you can buy more KRW with the forward rate than the spot rate. Therefore, the KRW forward rate is in depreciated terms compared to the spot rate. Which means its KRW forward discount. |
| safash | why multiplied by 4 |
| Creep | Because it's a 3 month forward rate, it needs to be multiplied by 4 to be annualized... hope this helps. |
| tichas | 3 months is quarter of a yr, if its 6 month then we multiply by 2 . |
| crazyman | Why isn't it compounded (0.964^4 = 0.8636 -->13.64% discount) |
| davcer | its a premium for the usd but discount for the KRW |
| ldfrench | Does anyone have a piece of rope? Preferably 6 feet or longer? |
| maryprz14 | isida; $:W is 833-863 means that $1 can buy 833 W now. Future; $1 can buy 863 instead. Means that $ is going to strength against W >>>>>> W is on Discount against $ (in 3 months from now) |
| momoetto | 833*(1+x)=863 => x=0.036; 0.036*4=0.14 =>14% Can i calculate like this? |
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Colin Sampaleanu
Learning Outcome Statements
explain spot and forward rates and calculate the forward premium/discount for a given currency;
calculate the mark-to-market value of a forward contract;
CFA® 2025 Level II Curriculum, Volume 1, Module 8.