What is the premium and discount relationship?
When the forward currency exchange rate happens to be higher than the spot rate, then the currency is said to be at a premium. Conversely, discounts occur when the spot rates are higher than the forward exchange rates. Hence, a negative premium is equal to a discount.
How should the premium or discount on the forward exchange contract be accounted for?
“ The above contract is for hedging foreign exchange risk against accounts receivables. Hence the tax treatment is as per para 8 (1) of ICDS VI i.e. : “Any premium or discount arising at the inception of a forward exchange contract shall be amortised as expense or income over the life of the contract.
How do you calculate forward forward and premium discount?
A forward discount exists when the currency’s forward price is lower than the spot price. To calculate a forward premium/discount, find the difference between the forward price and spot price and divide it by the spot price. A forward premium often indicates that the future domestic exchange rate may increase.
What does premium currency mean?
Quick Reference. Of two currencies, the one whose exchange rate is higher in the forward market.
How do you calculate discount premium?
In order to calculate the premium/discount, one takes the difference between the market price and NAV as a percentage of the NAV. A positive number means the ETF market price is trading above the NAV, or at a premium. A negative number means the ETF market price is trading below the NAV, or at a discount.
What is the difference between discount and premium bonds?
The biggest difference between premium and discount bonds centers on their trading price, relative to their par value. Premium bonds trade above par value while discount bonds trade below it. Discount bonds can be riskier but the lower the price, the higher the potential for gains.
What is forward premium and discount?
A forward premium is a situation in which the forward or expected future price for a currency is greater than the spot price. A forward premium is frequently measured as the difference between the current spot rate and the forward rate. When a forward premium is negative, is it is equivalent to a discount.
How do you account for foreign exchange transactions?
A foreign currency transaction should be recorded, on initial recognition in the reporting currency, by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction.
What is the discount factor formula?
For example, to calculate discount factor for a cash flow one year in the future, you could simply divide 1 by the interest rate plus 1. For an interest rate of 5%, the discount factor would be 1 divided by 1.05, or 95%.
What is forward premium or discount?
When a currency trades at a discount in the forward market?
A forward discount is a term that denotes a condition in which the forward or expected future price for a currency is less than the spot price. It is an indication by the market that the current domestic exchange rate is going to decline against another currency.
What means premium discount?
Premium Discount — a volume discount applied to premiums that acknowledges the administrative cost savings associated with larger premiums.
What is NAV premium or discount?
The discount/premium to NAV is a percentage that calculates the amount that an exchange traded fund or closed end fund is trading above or below its net asset value. This metric can be a valuable metric to track how far away a security is trading away from its true value.
Why do people buy discount bonds?
Interest Rates and Discount Bonds
A bond that offers bondholders a lower interest or coupon rate than the current market interest rate would likely be sold at a lower price than its face value. This lower price is due to the opportunity investors have to buy a similar bond or other securities that give a better return.
Why would you buy a discount bond?
Discount bonds can be attractive to investors who want to purchase bonds at a lower price. The discount price can help to offset lower yields associated with the bond. The deeper the discount, the higher the potential for gains from these bonds. And investors still benefit from regular interest payments.
What is forward discount currency?
What is a Forward Discount? A forward discount is a term that denotes a condition in which the forward or expected future price for a currency is less than the spot price. It is an indication by the market that the current domestic exchange rate is going to decline against another currency.
Where do you record foreign exchange gain or loss?
The foreign currency gain is recorded in the income section of the income statement.
Is foreign exchange gain debit or credit?
A foreign exchange transaction gain occurs when the transaction currency is different than the reporting currency for the company. On the initial transaction date, they would record the $100 sale with a debit to accounts receivable and a credit to revenue.
Why is discount factor used?
The discount factor is used most commonly when doing valuation using DCF analysis to compute the present value of future cash flow of each period or year. It is also used to calculate the net present value (NPV) which can be used to determine the net future value of an investment.
What is an example of discount rate?
For example, consider a payment of $1,000 received in 200 years. Using a 3% discount rate, the present value can be calculated as follows: $1,000/(1+3%)^200 = $2.71. At a slightly higher discount rate of 4%, the present value is calculated to be only $0.39, which is about 7 times smaller.
What is forward premium explain with suitable example?
Forward Premium is a situation when the future exchange rate is more than the spot rate. So it is an indication of currency depreciation. For example, an increase in demand for foreign products results in more imports, resulting in foreign currency investing, resulting in domestic currency depreciation.
What is FX discount?
What is the difference between premium and discount bond?
What is a discount premium?
Premiums. A discount is the opposite of a premium. When a bond is sold for more than the par value, it sells at a premium. A premium occurs if the bond is sold at, for example, $1,100 instead of its par value of $1,000.
Which is better premium or discount bonds?
Premium bonds trade above par value while discount bonds trade below it. Discount bonds can be riskier but the lower the price, the higher the potential for gains. Premium bonds can deliver higher returns with less risk, but they can be problematic if they become callable.