Alright so I know this is review from prior levels, but it randomly shows up in some solutions so I just want to check on this (not sure where exactly it’s in the texts). Forward Premium/Discount = (F - S) / S (quotes given in DC/LC) If the solution is a POSITIVE number, then is the DC or LC at a premium/discount? And does this imply that the DC or LC will depreciate/appreciate? I know this is very basic, but it’s been a VERY long day.
Since you’re DC/LC, and # is positive, you’re saying foreign currency is at a premium and will appreciate. This can be estimated as domestic interest rate - foreign IR. Same thing, if difference is positive, foreign currency at a premium and will appreciate. The country with the higher rate will see a depreciation (contrary to econ where higher REAL rate country will see appreciation)