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In this article,how have they calculated the 1.5 yr and 6mth spot rates to use at conversion for the projected cash flows?
Thanks alot sir
He has used the purchasing power parity formula from the formula sheet.
The relevant spot rate now is 175; the rates of inflation are 5% in the home country and 30% in the foreign country.
So the forecast spot rate in 1 years time is 175 x (1.30/1.05) = 217
Similarly in 2 years time it will be 217 x (1.30/1.05) = 269For the rate in 6 months time he has taken half way between the current spot and the rate in 1 years time. For the rate in 18 months time he has taken half way between the 1 year and 2 year forecasts.
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