how shall we find estimated future spot rate for forex swap. we have to find it through purchasing power parity but there are different probabilities are given. so which rate would be selected
Dear Mahvish Assalam o alaikum,
This paper might have been removed from ACCA website, Please let me know if this in available in revision kit so i would check it later today.
Please can you check the exam date.
I have the December 2006 exam in front of me (it was Paper 3.7 in those days) but there is no question called Calvold and no question on swaps
John! please refer to Kaplan revision kit, it is available under in treasury section A questions, though i have not gone through it.
the Name “calvold Inc” is in part (b) of the question.
OK – I found it (but I don’t know why Kaplan say it was Dec 2006!)
You are correct to say that you are expected to use purchasing power parity to forecast the exchange rates.
There are two approaches that you could take. One would be to calculate the expected inflation rates (the weighted averages) and use them to forecast the exchange rate.
You would get credit for this, but the problem is that the actual inflation rates would not be an average, but we one of the possibilities listed.
A better approach (and the one that the examiner took) is to calculate three different exchange rates – one for each set of inflation rates – then see in each case whether or not the swap is beneficial, and then comment on the likelihood of it being beneficial or not.
Do not expect to end up with an answer saying it is definitely beneficial, or definitely not beneficial – he wanted you to comment on how likely it might be to be beneficial.
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