Understanding Forward Premium and Discount

Understanding Forward Premium and Discount

Professional Development

15 Qs

quiz-placeholder

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Understanding Forward Premium and Discount

Understanding Forward Premium and Discount

Assessment

Quiz

Other

Professional Development

Easy

Created by

ANKIT WALIA

Used 3+ times

FREE Resource

15 questions

Show all answers

1.

MULTIPLE CHOICE QUESTION

2 mins • 1 pt

What is the formula to calculate forward premium or discount?

Forward premium or discount = (Spot rate - Forward rate) / Spot rate * 100

Forward premium or discount = (Forward rate - Spot rate) * Spot rate / 100

Forward premium or discount = (Forward rate - Spot rate) / Spot rate * 100

Forward premium or discount = (Forward rate + Spot rate) / Spot rate * 100

2.

MULTIPLE CHOICE QUESTION

2 mins • 1 pt

Explain the concept of forward premium and forward discount with examples.

Forward premium and forward discount are determined by the interest rate differentials between two currencies. For example, if the interest rate in the US is higher than in Japan, the forward exchange rate of USD/JPY will reflect a forward premium for USD and a forward discount for JPY.

Forward premium and forward discount are determined by the stock market performance of the countries involved.

Forward premium and forward discount are determined by the weather conditions in the countries involved.

Forward premium and forward discount are determined by the population size of the countries involved.

3.

MULTIPLE CHOICE QUESTION

2 mins • 1 pt

What are the factors that affect forward premium and discount?

Government regulations

Consumer spending habits

Weather patterns

Factors that affect forward premium and discount include interest rate differentials, inflation differentials, and market expectations about future exchange rates.

4.

MULTIPLE CHOICE QUESTION

2 mins • 1 pt

How do changes in interest rates affect forward premium and discount?

Higher interest rates have no impact on forward premium

Higher interest rates can lead to a lower forward premium

Higher interest rates can lead to a higher forward premium, while lower interest rates can lead to a forward discount.

Lower interest rates can lead to a higher forward premium

5.

MULTIPLE CHOICE QUESTION

2 mins • 1 pt

Calculate the forward premium or discount when the spot exchange rate is 1.5 and the 3-month forward rate is 1.55.

The forward premium or discount is 2.5%

The forward premium or discount is 3.33% (calculated as (1.55 - 1.5) / 1.5 * 100)

The forward premium or discount is 0.05%

The forward premium or discount is 10%

6.

MULTIPLE CHOICE QUESTION

2 mins • 1 pt

Discuss the relationship between interest rate differentials and forward premium or discount.

Forward premium is created when interest rates are the same for both currencies

Interest rate differentials have no impact on forward premium or discount

Forward discount is created when interest rates are the same for both currencies

Interest rate differentials affect the forward premium or discount. When the interest rate of one currency is higher than another, it creates a forward premium for the higher interest rate currency and a forward discount for the lower interest rate currency.

7.

MULTIPLE CHOICE QUESTION

2 mins • 1 pt

What is the significance of forward premium and discount in international trade?

Forward premium and discount only impact domestic transactions

Forward premium and discount are significant in international trade as they reflect the expected future exchange rate movements, which can impact the cost and profitability of international transactions.

Forward premium and discount have no significance in international trade

Forward premium and discount are only relevant for short-term trade

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