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the current spot rate for the dollar/euro is $/e 2.000 +- 0.003. the dollar is quoted at a 0.2c premium for forward rate
so the forward rate is 2.003 – .002 = 2.001
i cant not understand the answer explnation given in bpp kit.
why is the premium being deducted?
what does a premium mean?
thank u
You can not have watched the lectures because I go through lots of examples on this (and I cannot type out the entire lecture here!).
If the dollar is being quoted at a premium it means the dollar is going to strengthen and so there will be fewer dollars to the euro – so we subtract the premium.
(Similarly we add a discount)
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