Answer to Question #7223 in Economics of Enterprise for LaMarcus Streeter
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%
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.