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Good Day All,
I am having trouble deriving the expression for the forward premium or discount given the covered interest rate parity equation.
F f/d = S f/d ( 1 + if [Actual/360] / 1 + id [Actual/360]) is the Forward Rate formula. However, I am having trouble re-arranging this to get the forward premium/discount formula, given by:
F f/d – S f/d = S f/d ( Actual/360 / 1 + id [Actual/360] ) (if – id)
Can anyone show me the re-arrangement of the formula?
Thank you
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Hi @GraemeA, try the following:
Start with the first formula and subtract S_f/d from both sides. The left-hand side is obvious; in the right-hand side, factor out S_f/d and you are left with a fraction that looks like (for more clarity I omitted the “Actual/360” from the notation):
(1+if)/(1+id) -1, which equals [(1+if) – (1+id)]/(1+id), which in turn reduces to (if – id)/(1 + id).
Hope this helps!
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