Problem 6.13 Indirect Quotation on the Dollar
Calculate the forward premium on the dollar (the dollar is the home currency) if the spot rate is €1.0200/$ and the three-month
forward rate is €1.0300/$.
Assumptions
Days forward
European euro (€/$)
Quoted
Spot rate
€ 1.0200
90-day
Forward rate
90
€ 1.0300
Percent premium
or discount on euro
Calculation formula for the indirect quote on the dollar:
Percent premium = (S-F)/(F) x (360/90)
-3.8835%
The euro would be selling forward at a premium against the dollar, or equivalently, the dollar selling
forward against the euro at a discount.
In a way, the terminology is a bit tricky. One might say that the "forward premium is a premium."
Check calculation
One way to check percentage change calculations is to invert each of the currency
quotes (1/(€/$)), and recalculate the quote using the direct quotation formula.
European euro ($/€)
Percent discount = (F-S)/(S) x (360/90)
$0.9804
$0.9709
-3.8835%