A forward premium for a given currency (say the nominal bilateral exchange rate value of the dollar where S = 80 yen/1 dollar = 80) occurs when the value of the currency as given by the forward spot rate appreciates such as S = 85 yen/1 dollar = 85. If a currency such as the dollar has a lower forward spot rate where S = 75, it depreciates and is at a forward discount. If Fn = 85 is the forward spot rate for yen/1 dollar n months from now and S = 80 is the current spot rate of yen/1 dollar, then the dollar is at a forward premium while the yen is at a forward discount. The percentage change is the same formula but it can be converted to an annualized percentage change by using the formula (Fn - S)/S x (12/n) x 100. If Fn = 81 yen/dollar = 81, S = 79, and n = 3 months, what is the annualized percentage forward premium for the dollar? The annualized percentage forward discount for the yen? 5. Cross-rates allow you to calculate a third exchange rate from two that are known and that have a common currency. The method requires that you set up the cross-rate multiplication so that the common currency is canceled out. For example, if a U.S. dollar is worth 80 yen or 1.4 Canadian dollars, then how many yen is 1 Canadian dollar worth? This can be determined by setting up a cross-multiplication that cancels out the common currency, in this case the U.S. dollar. You can't just go (80 yen/1 dollar) x (1.4 Canadian dollars/1 dollar) because the dollar doesn't cancel. Thus you must invert one side or the other such as obtaining .013 dollars/1 yen. Now you can just do (.013 dollars/yen) x (1.4 Canadian dollars/1 dollar) = .013 x 1.4 and you will have the number of Canadian dollars per yen. If you want it as yen per Canadian dollars, just invert it. If the Danish Crone is 7.5 Kr/dollar and the British pound is worth $1.58, then what is the exchange rate in Kr per British pound? 6. Forward premiums and discounts imply that there is risk in foreign exchange transactions. 6a. Explain the three types of FX risk? 6b. How can foreign exchange rate risk be fully covered or hedged? 6c. Foreign exchange risk also allows for speculation through financial instruments known as foreign exchange derivatives. What are three common types of foreign exchange derivatives and how do they work?