Forward Discount and Forward Premium

Forward discount and forward premium are the terms which are used in the context of foreign exchange market to denote the pricing of exchange rate between the two currencies. Let’s look at both the terms in detail –

Forward Discount – It refers to a situation where the spot exchange rate of a currency is trading at higher level than future spot rate. So for example if rupee dollar is quoting at 55 rupees per dollar in spot market and in futures it is quoting at 54.5 than it refers to forward discount.

Forward Premium – It refers to a situation where the spot exchange rate of a currency is trading at lower level than future spot rate. For example if rupee dollar is quoting at 55 rupees per dollar in spot market and in futures it is quoting at 55.55 than it refers to forward premium.

Many hedgers and arbitrageurs look closely at these rates in order to take advantage of fluctuations in forward and spot rates and make risk less profits from such transactions.

 

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