CFA Practice Question

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CFA Practice Question

The spot rate $:KRW (Korea Won) = 833. The 3-month forward rate is $:KRW = 863. What is the KRW's forward premium (or discount) on the dollar, expressed as an annual rate?

A. 4% discount
B. 4% premium
C. 14% discount
Correct Answer: C

4 x (863-833)/833 = 14.4%

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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