This should be easy, but for some reason I have problems with it. For example: The GBP/USD spot rate is 2.0. The 3-month forward rate is 2.1. So is the dollar trading at a forward premium because it will cost more pounds to buy a dollar forward than spot? That is the way I think of it, but I am not sure if I am right. Can someone help me out with this?
correct. USD is in Forward premium.
always consider of base currency i.e. USD. You are right!
That’s the way I interpret it. You made it a little tougher by using a very unrealistic rate though.
it costs 2 pounds per . soon it wil cost 2.1 pounds per … which means it will cost more pound per $… So, pound is depreciating, the dollar is appreciating since dollar is appreciating, the dollar is strong strong=premium weak = discount dollar trades strong, at a premium