Forward premium/discount

CFA Level III
#1

Hopefully this is a simple question, but I’m in panic mode right now b/c I cannot remember this. . .in this example, is the MXN/GBP trading at a forward premium simply because the forward points are positive? If not, how do you know it trades at a fwd premium?

(R18 Example 5)

MXN/GBP spot rate (bid–offer) One Month Ago: 20.0500/20.0580 Today: 19.5985/20.0065 One-month forward points (bid–offer) One Month Ago: 625/640 One Month Ago: 650/665 Two-month forward points (bid–offer) One Month Ago: 875/900 Today: 900/950

#2

Yes b/c the points are positive the base currency GBP is trading at forward premium.

#3

Addind the fwd points to the spot rate, means less MXN for GBP, so the GBP is trading a premium (expecting to appreciate)

#4

Sorry, but how do we know that the GBP is trading at a premium? I can’t seem to work this out?

#5

Look at the forward points (650/665). They’re positive, so the forward exchange rate is more price currency (MXN) per unit of base currency (GBP): GBP is trading at a forward premium.

If the forward points were negative, the forward exchange rate would be fewer price currency (MXN) per unit of base currency (GBP), so GBP would be trading at a forward discount.

#6

You add the fwd points, meaning more MXN per GBP (base currency), so the GBP is at a premium (gaining value). Right?

#7

Correct.