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Premium

Page history last edited by PBworks 15 years, 9 months ago

Premium

 

Foreign Exchange Related

 

 

If the forward exchange rates > spot...then the forward foreign currency is at a "Premium".

If the forward exchange rates < spot...then the forward rate of the foreign currency is at a "Discount"

 

Example: if the spot Euro is 1.10 EU = $1 USD, and a month "forward" the Euro is 1.05 EU = $1 USD, then, because fewer Euros are needed to buy a dollar in the forward rate than are needed to buy a dollar at the the spot rate, then the Euro is more valuable in the forward market than in the spot market. This means that the forward Euro is at a PREMIUM. On the other hand, the dollar is at a DISCOUNT because its future value is less than its current value.

 

Forward exchange is quoted in terms of discount or premium that must be added to (or subtracted) from the Spot rate.

 

 

If the domestic interest % > foreign....then foreign forward = sell at premium

If the domestic interest % < foreign....then foreign forward = sell at discount

 

More links

 

Discount

foreign currency trading

Foreign exchange Options

Futures market

foreign exchange Swaps

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