Lessons
- CFA Level 2: Economics - Introduction
- Economic Growth
- Changes in Productivity: The One-Third Rule
- The Productivity Curve
- Economic Growth Theories
- Government Regulation, Deregulation, and Regulatory Behaviour
- Gross Domestic Product (Measuring Economic Activity)
- International Trade & Trade Restrictions
- Balance of Payments
- Foreign Exchange Rate Systems and Parity Relationships
- Foreign Exchange Floating Rate Systems
- Fixed Exchange Rate Systems
- Overview of Currency Markets
- Forward Exchange Rates
- Interest Rate Parity
- Purchasing Power Parity (PPP)
- International Fisher Relation
- Uncovered and Covered Interest Rate Parity Relationship
- Forecasting Exchange Rates
- CFA Level 2 Economics – Recommendations
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.
Download: Forward Rate Calculator Excel
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