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Answer on Economics of Enterprise Question for LaMarcus Streeter

Question #7223

2. If the spot rate of the Israeli shekel is 5.51 shekels per dollar and the 180-day forward rate is 5.97 shekels per dollar, then the forward rate for the Israeli shekel is selling at a ________________ to the spot rate.

a. premium of 8%
b. premium of 18%
c. discount of 18%
d. discount of 8%
e. premium of 16%

Expert's answer

The answer is D.

As one can obtain more Israeli shekels for a dollar in
the forward market, the forward currency is selling at a discount to the spot
rate. Thus, the amount of the discount is calculated as: (Forward rate − Spot
rate)/Spot rate.

% Discount = 8.35%

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