Explain what it means for a forward currency to sell at a discount and at a premium.

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Explain what it means for a forward currency to sell at a discount and at a premium.

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Explain what it means for a forward currency to sell at a discount and at a premium.

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Forward rate is the rate which is agreed to be paid, to buy foreign currency which would be delivered at a certain future day.
 
Forward rate may be selling at premium, or at a discount to the spot rate.
 
When the value of the foreign currency in comparison to the home currency is appreciating, it asserts that the forward rate is selling at a premium to the spot rate. In practical terms, it implies that a dollar buys less units of foreign currency in the forward market (i.e at a future date) as compared to the spot market (current date). For instance, if a dollar exchange rate is 70 Rs.(INR) per dollar at a current date, and at a certain future date, the exchange rate is only 60 Rs. per dollar, then such change is due to appreciation in foreign (here INR) currency.
 
On the contrary, if the foreign currency value depreciates in comparison to the domestic currency, it is said that foreign currency is selling at a discount to the spot rate. In such a case, a dollar can buy more number of foreign currency units in the forward market, than in the spot market. For example, a dollar exchange rate is 75 Rs. (INR) per dollar in spot market, if foreign currency is trading at a discount, the future exchange rate will be more than 75 Rs. per dollar in forward market.

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