To calculate the Forward Premium (\(FP\)):
\[ FP = \left(\frac{FR - SR}{SR}\right) \times \left(\frac{360}{D}\right) \times 100 \]
Where:
A forward premium is the percentage difference between the forward exchange rate and the spot exchange rate of a currency. It indicates whether a currency is expected to appreciate or depreciate in the future. If the forward exchange rate is higher than the spot exchange rate, the currency is said to be at a forward premium. Conversely, if the forward exchange rate is lower than the spot exchange rate, the currency is at a forward discount. Forward premiums are commonly used in foreign exchange markets to hedge against currency risk and to speculate on future currency movements.
Let's assume the following values:
Using the formula:
\[ FP = \left(\frac{1.25 - 1.20}{1.20}\right) \times \left(\frac{360}{90}\right) \times 100 = 16.67 \% \]
The Forward Premium is 16.67%.
Let's assume the following values:
Using the formula:
\[ FP = \left(\frac{1.10 - 1.05}{1.05}\right) \times \left(\frac{360}{180}\right) \times 100 = 4.76 \% \]
The Forward Premium is 4.76%.