Forward Rate: $1.60/1 pound Spot: 1.75/1 pound The exact forward premium/discount for the pound against the is 1.6-1.75/1.75 = -8.57% or a forward discount of -8.57% of the pound against the dollar. Why is it then, that when you convert the rates to pound/, the discount changes?? 1/1.6 = .625 pound/1 Forward Rate 1/1.75 = .57143 pound/1$ Spot Rate Forward premium/discount calculation = .625 - .57143 / .57143 = - 9.374% discount What causes the difference between these answers?
since the operations are completely different in the first case it is (a-b)/b in the 2nd case => (1/a - 1/b) / (1/b) = ((b-a)/ab)/(1/b) = (b-a)/a