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Hi,
I have watched and think I understand the lecture which talks about premiums / discounts on forward rate contracts. So premiums are subtracted, and discounts added – to reflect whether the currency is expected to weaken or strengthen. That is my understanding.
However the BPP text book states that ‘IF the company is selling the foreign currency the premium must be subtracted from the exchange rate. If the company is buying..the premium is added’.
This seems a completely different rationale and also is cheaper for the company/ more expensive for the bank.
Are these two different types of premium that I am confusing?
Thank you
I don’t have the BPP book and so I cannot check whether or not they are talking about the same thing.
However, if they are talking about the way forward rates are quoted (as a premium or discount on spot) then what you have copied out from them is complete rubbish 🙂
What I say in the lecture is correct.(However, it does seem that the F9 examiner is unlikely these days to quote forward rates as pm and dis (even though that is what appears in the newspapers). He has made it easier by giving the exact rates. But that doesn’t make what you have typed from BPP any more correct!! 🙂 )
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