1.   A premium is deducted from the existing spot rate.

2.   Banks quote spot rates against the dollar.

3.   The forward rates quoted by banks in the foreign exchange Market stand either at a premium or discount in relation to the spot rate.

4.   The spot rate is also known as the basic rate or telegraphic transfer rate.

5.   This is guaranteed by the bank, irrespective of what happens to the spot rate over the next three months.

6.   This assumption implies that the forward rate is an unbiased predictor of the future spot rate.

7.   Equation says that, when covered interest parity holds, the ratio of the forward to the spot rate equals the ratio of relative interest rates.

8.   Premiums are therefore deducted from the spot rate.