Forward Exchange Rates
Forward contracts commonly trade at premiums or discounts to the spot rate and the presence of a premium or discount provides an analyst with insights into the market’s expectation for one currency’s appreciation or depreciation against another currency.
Annualized Forward Premium =((F X-dom/Y-for – Spot X-dom/Y-for)/Spot X-dom/Y-for))*(12 / # of months to settle) * 100
When this calculation is positive, the forward contract is trading at a premium and this implies that foreign currency Y is likely to strengthen against domestic currency X over the remaining period of the contract.
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