Forward discount or premium, annualised
FD or FP = ((FR - SR) / SR) x (12 / n) x 100
Any question giving a spot rate and a forward rate. Positive is a premium, negative a discount. The slide's 'x 4' is only the n = 3 case.
- FR
- Forward rate, in domestic currency per unit of foreign currency
- SR
- Spot rate, the same way round, and always the denominator
- n
- Maturity in months: factor is 12 for one month, 4 for three, 2 for six, 1 for twelve
Cost of forward cover
Cost of cover = amount x (FR - SR)
as a % of the spot value = (FR - SR) / SR x 100
Comparing a forward contract with paying at today's spot rate. A premium makes cover a cost; a discount makes it a saving.
- Amount
- The foreign currency sum being covered
- FR - SR
- Positive means the hedger pays for certainty; negative means the hedger is paid for it
Swap rate
Swap rate = forward rate - spot rate
Pricing a currency swap, which is a spot sale plus a forward repurchase in one transaction. It is the same raw gap that the annualised premium or discount is built from.
- Forward rate
- The rate on the repurchase leg
- Spot rate
- The rate on the sale leg, settling within two business days