Question

A currency is at ........ if it is more expensive in forward market than in the spot market. A currency is at ...... if it is cheaper in the forward market than in the spot market.

• A. Discount, premium
• B. Premium, disount
• C. Profit, loss
• D. Loss, profit

Answer 1

Answer: (B)

Premium, disount

If the forward price of a foreign-exchange is less than the spot price, the currency is selling at a forward premium. When profits from arbitrage occur because of the price differences in the two countries, its called geographic arbitrage. When the forward currency exchange rate happens to be higher than the spot rate, then the currency is said to be at a premium. Discounts occur when the spot rates are higher than the forward exchange rates. Hence, a negative premium is equal to a discount.