Annualised Forward Premium Calculator

Formula Used:

\[ p = \left( \frac{FR - S}{S} \times \frac{360}{n} \right) \times 100 \]

Annualised Forward Premium (p):

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1. What is Annualised Forward Premium?

Annualised Forward Premium is the difference between the forward exchange rate and the spot exchange rate, expressed as an annualised percentage. It indicates whether a currency is trading at a premium or discount in the forward market compared to the spot market.

2. How Does the Calculator Work?

The calculator uses the formula:

\[ p = \left( \frac{FR - S}{S} \times \frac{360}{n} \right) \times 100 \]

Where:

\( p \) — Annualised Forward Premium (%)
\( FR \) — Forward Rate (agreed-upon exchange rate for a future currency transaction)
\( S \) — Spot Rate (current exchange rate for immediate currency exchange)
\( n \) — No. of Days (number of days over which the forward premium is annualized)

Explanation: The formula calculates the percentage difference between forward and spot rates, then annualizes this difference using a 360-day year convention.

3. Importance of Annualised Forward Premium

Details: The annualised forward premium is crucial in foreign exchange markets as it reflects market expectations about future currency movements, interest rate differentials between countries, and helps in arbitrage and hedging strategies.

4. Using the Calculator

Tips: Enter forward rate and spot rate in the same currency units, and the number of days for the forward contract. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What does a positive annualised forward premium indicate?
A: A positive premium indicates that the foreign currency is trading at a forward premium, meaning it's expected to appreciate against the domestic currency.

Q2: Why use 360 days instead of 365 for annualization?
A: The 360-day year is a banking convention used in many financial calculations for simplicity and consistency across markets.

Q3: How does interest rate parity relate to forward premium?
A: According to interest rate parity theory, the forward premium should equal the interest rate differential between two countries.

Q4: Can forward premium be negative?
A: Yes, a negative premium (forward discount) occurs when the forward rate is lower than the spot rate, indicating expected depreciation.

Q5: How accurate are forward premiums in predicting future spot rates?
A: While forward rates incorporate market expectations, they are not always accurate predictors of future spot rates due to various market factors and uncertainties.