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Hi!
During my studies for F9 via the study text from BPP, I was wondering whether the “Exam Focus Point” on p. 374 (Chapter 19: Foreign Currency Risk) is correct:
It relates to the premium for forward exchange contracts.
It says: “If the company is selling the foreign currency, the premium must be substracted from the exchange rate. If the company is buying the foreign currency, the premium is added to the exchange rate.”
Should it not be the other way around?
In the example on p. 375 (4.7.3.), I would have expected that 2.6392 is used as forward rate (bank charges a premium when selling the currency to the importer).
Do I misunderstand this or did anyone have the same question?
I would be glad about a short reply!
Best regards
I am sorry but I do not have a BPP Study Text and so I cannot answer you.
The only premium that could be mentioned in the exam (and even in the exam it is now doubtful) is if forward rates are quoted at a premium or discount against the current spot rate.
(This premium is nothing to do with banks charges and if this is the premium that BPP are writing about then they are wrong. If they are talking about banks charges then it is not relevant for the exam.)This is covered in full in my lecture on foreign exchange risk management.
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