The US dollar-yen spot rate is 125 yen/$, and the 90-day forward exchange rate is yen 127 yen/$. Then the yen is selling at a annual ________ of ___________.

Group of answer choices

 

 

premium; 1.57%

 

discount; 6.30%

 

discount; 1.57%

 

premium; 6.30%

discount; 6.30%

Step-by-step explanation

Since the same amount, in dollars, would buy you more yen at the 90-day forward rate, the yen is selling forward at a discount. The discount per annum is given by:

Discount per annum = (90day forward exchange rate - current exchange rate) / 90day forward exchange rate x (360days/90days)

Discount per annum = (127 - 125) / 127 x (360/90)

Discount per annum = 2/127 x 4

Discount per annum = 0.0157 x 4

Discount per annum = 0.063 or 6.30%

The yen is selling forward at a per annum discount of 6.30%