Answer:
1. Discount
2. 6.30%
Explanation:
1. Forward discount means that more units of a currency is needed to a unit of another currency in the future. In the question, 2 (127 - 125 = 2) more units of yen will be needed in the future to buy the same one unit of the US dollar.
2. To calculate the percentage of the forward discount, we use the forward discount formula as follows:
Forward discount = {[(1 ÷ Forward rate) - (1 ÷ Spot rate)] ÷ [1 ÷ Spot rate]} x {360 ÷ 90)}
Forward discount = {[(1 ÷ 127) - (1 ÷ 125)] ÷ [1 ÷ 125]} × {360 ÷ 90}
= {[0.007874016 - 0.008 ] ÷ [0.008]} × 4
= {-0.000125984 ÷ 0.008} × 4
= -0.015748 × 4
= -0.062992 = - 6.30% approximately.
Therefore, the negative sign shows that the yen is selling at a per annum discount of 6.30%. This indicates yen worth less in the future against the US dollar.
Answer: The yen is selling at a per annum "DISCOUNT of -6.30%"
Explanation: This is a per annum discount, because the amount of dollar used in buying the yen has reduced, which made the $1 to be able to buy 127yen instead of 125yen.
To find the forward discount;
[(1 ÷ forward rate) - (1 ÷ spot rate) / (1 ÷ spot rate)] × (360 ÷ 90)
Spot rate = 125
Forward rate = 127
Therefore forward discount is
[(1÷127) - (1÷125) / (1÷125)] × (360÷90)
(-0.000126 / 0.008) × 4 = -0.063
Therefore forward discount = -6.30%
The negative sign means that it is a percentage discount
