Formula dought???

Assuming Rs.50 per Dollar,,

We use formula no.1 (F-S/S)*(12/n)*100 to know the currency appreciation or depreciation of dollar.

We use Formula 2 to know app/dep of rupee.

 

Bhavik, the above formulas are used to find forward premium/discount of currencies. We use the formula-1 when we have direct quote of the currency. And we use formula2 when we have indirect quote of currency.

Consider this example Spot rate: $1=Rs.32(DIRECT QUOTE OF dollar) and Rs.1=$1/32 (INDIRECT QUOTE OF DOLLAR) 1year forward rate are- $1=Rs.40 (DIRECT QUOTE of $) and Rs1=$1/40 (INDIRECT QUOTE OF $). Now using indirect quote (using formula 2) we can find forward premium/discount as follows- (1/32 - 1/40)/ (1/40) solving which we get 25% which means dollar currency will be at 25% premium in one year time. Similarly you can get the same answer using Direct Quote by formula1. Hope it helps. Regards.

Firstly its not a Formula rather logic.

The issue is that in case of First Formula u r Finding out the premium or discount considering Forward rate as base which is inappropraite.

in second u r considering Spot Rate as base..

Tats it.

usually u wanna knw premium or discount from Spot rate perspective..

(40-32)/32=25%.

u say $ has gone on premium ,how.

i e 32 *1.25=40.

as simple as tat.