Certified Management Accountant Practice Exam 2026 - Free CMA Practice Questions and Study Guide

The calculation of the forward premium or discount is based on the difference between the forward rate and the spot rate. The correct formulation allows us to determine how much the currency is expected to either appreciate (premium) or depreciate (discount) in relation to the underlying currency over a specific time period.

In this case, the difference between the forward rate and the spot rate is divided by the spot rate to express this difference as a percentage of the spot rate. This approach effectively shows whether the forward rate is higher or lower than the current spot rate, which helps in assessing whether a currency will strengthen or weaken. The multiplication by the number of days in the year and dividing by the number of days in the forward period converts this calculation to an annualized percentage, which is a standard practice in finance to present such metrics on a uniform basis.

This method provides a comprehensive view of the change in value and facilitates better decision-making in currency trading and hedging activities. In summary, the correct calculation highlights the relationship between the forward and spot rates and allows for an accurate assessment of market expectations regarding currency valuation over time.