The forward premium/discount is ...

The forward premium/discount is ...

• A. It represents the difference between the current spot rate and the agreed forward rate for delivery
• B. It is never negative
• C. It is always positive
• D. It is fixed in advance

Answer: (A)

The forward premium/discount tells you how far the rate agreed for future delivery differs from today’s spot rate. That difference captures the cost of locking in exchange rates for a future date, which moves with interest rate differentials and market expectations. If the forward rate is higher than the spot rate, you’d have a premium; if it’s lower, a discount. This value can be positive or negative and it isn’t fixed in advance, since it changes with market conditions. So the statement that it represents the difference between the current spot rate and the agreed forward rate for delivery best captures what the forward premium/discount is.

The forward premium/discount tells you how far the rate agreed for future delivery differs from today’s spot rate. That difference captures the cost of locking in exchange rates for a future date, which moves with interest rate differentials and market expectations. If the forward rate is higher than the spot rate, you’d have a premium; if it’s lower, a discount. This value can be positive or negative and it isn’t fixed in advance, since it changes with market conditions. So the statement that it represents the difference between the current spot rate and the agreed forward rate for delivery best captures what the forward premium/discount is.