Suppose the domestic currency is the US$ and the foreign currency is the British pound.

• The spot exchange rate is $1.4718.
• The U.S. interest rate is 4.5%.
• The British interest rate is 2.25%.
• Assume these interest rates are fixed and don't change over the life of the forward contract. They are based on annual compounding and are not quoted as LIBOR-type rates.
• Assume a currency forward contract has a maturity of 120 days.

With discrete compounding, what should be the forward price if you want to enter into a forward contract to long British pounds in 120 days?

Explanation: F(0, T) = F(0, 120/365) = [1.4718/(1.0225)^120/365] (1.045)^120/365 = 1.4824