Hi, everyone
I’ve got a problem about forward premium in p. 325, Book 5
one year Eurocurrency rate 6% in U.S. 0.8% in Japan
Why the forward premium is calculated by 1.06*1.008-1=5.16% ?
Thanks in advance!
1.06/1.008 not 1.06*1.008. It is just an exact method rather than subtracting the diff.
The euro should depreciate by that amount
but what is the formula for foward discoutn / premium:
F-S/S
and why not 1.008/1.06
since the quotation is in YEN / USD - i thought we then use this formula:
F= S * (1+i domestic) / (1+ i foreign)
where is my mistake? thanks
please!
it is domestic - foreign
US = domestic
so the approximate answer is: 6.0 - 0.80 = 5.20%
dont get hung up about dc/fc quotation…as long as the left and right quotations match and you know how to interpret…you will be fine!
think a/b quotation
F=S*(1+r[a])/(1+r[b])…whatever a/b is …could be dc/fc or fc/dc…as long as the left and the right side is quoted consistently.
ok but why is it then not 1.008/1.06 as it is yen / usd?
1.008 / 1.06 = .950943
inverse of that = 1.0516 - 1 = 5.16%, which is the answer
This is a stupid question, but i always seem to confuse how they want us to represent the answer: which one is at the “discount” obviously the euro should depreciate, and yen appreciate, so that means the yen trades at a forward premium and euro discount, correct?
Just double checking bc i thought i saw them word it the other way since the quotation will be smaller because it takes less yen per euro.
Premium(discount) = (F-S)/S . The rate is always with respect to your own currency as an investor in the numerator .
If you are in Europe and they say fwd Dollar is trading at a discount , then it means EUR/USD in a forward quote is lower than EQUR/USD in spot.
So in other words, correct?
euro should depreciate, EUR/JPY
If fwd is lower than spot , yes the market expects the EUR/JPY forward is lower than EUR/JPY Spot and the interest rates should confirm that European rates are higher than JPY rates.
S-F-F-D ( San Fansisco Fire Department )
S/(+rf)=F/(1+rd) for parity .
If F lower than S , then rf lower than rd