Forecasting exchange rate movements

Home Forums Ask ACCA Tutor Forums Ask the Tutor ACCA F9 Exams Forecasting exchange rate movements

This topic contains 5 replies, has 2 voices, and was last updated by Avatar of johnmoffat John Moffat 1 year, 7 months ago. This post has been viewed 33 times

Viewing 6 posts - 1 through 6 (of 6 total)
  • Author
    Posts

  • avatar
    atab
    Participant
    • Topics: 72
    • Replies: 158

    Regarding forecasting exchange rate movements according to my notes I have got the following two formulas:

    - Inflation: S1 = S0 x (1+hc / 1+hb)
    Where hc = inflation in country overseas
    hb = base country inflation

    - Interest: F0 = S0 x (1+ic / 1+ib)
    Where c = interest in country overseas
    b = base country interest

    However, according to the answers in my revision kit they are the other way round. Could you kindly tell me which one is correct please?


    Avatar of johnmoffat
    John Moffat
    Keymaster
    • Topics: 3
    • Replies: 5425

    What you have written is correct, provided you are defining the ‘base’ county correctly.

    If for example the exchange rate is quoted in $’s per £, then the ‘base’ country is the UK.
    If the exchange rate is quotes as Euros per $, then the ‘base’ country is the US.


    avatar
    atab
    Participant
    • Topics: 72
    • Replies: 158

    Ok, thank you that was helpful. Also does ‘h’ refer to inflation and ‘i’ to interest please as I always seem to get that confused?


    Avatar of johnmoffat
    John Moffat
    Keymaster
    • Topics: 3
    • Replies: 5425

    Yes – h is inflation and i is interest :-)
    (but it is the same formula so it doesn’t really matter too much :-) )


    avatar
    atab
    Participant
    • Topics: 72
    • Replies: 158

    Thanks a lot really helpful :)


    Avatar of johnmoffat
    John Moffat
    Keymaster
    • Topics: 3
    • Replies: 5425

    You are welcome :-)

Viewing 6 posts - 1 through 6 (of 6 total)

You must be logged in to reply to this topic.