Suppose the spot rate and forward rate for the British pound are $1.25/₤ and $1.2/₤ respectively....
Suppose the spot rate and forward rate for the British pound are $1.25/₤ and $1.2/₤ respectively. Assume the forward pound is selling at an 8% (annualized) discount, what is the number of days of the forward contract?
a. 60 days b. 90 days c. 180 days d. 30 days
Homework Answers
| Given, | ||||||||||
| Spot rate | $1.25/GBP | |||||||||
| Forward rate | $1.2/GBP | |||||||||
| Forward discount on GBP | 8% | |||||||||
| We know, | ||||||||||
| Annualised forward discount on GBP= ((Forward rate-Spot rate)/Spot rate)*100*(360/number of days of forward contract) | ||||||||||
| -8=((1.2-1.25)/1.25)*100*(360/number of days of forward contract) | ||||||||||
| Therefore by solving, | ||||||||||
| Number of days of forward contract= 180 days | ||||||||||
| * assuming number of days in a year=360 days | ||||||||||
| Answer: Option C |
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