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Good afternoon John,
I was wondering if you could help with calculation of the forward rate for case one in Q2/Dec 2012 Lignum Co.
The rate is determined as as ZP base rate of 8.5% plus 25 basis point and EUR base rate 2.2% less 30 basis points. Spot is ZP/EUR 142.
Particularly, I am not sure why both base rates are divided by 3 (e.g. 1+(0.085+0.0025)/3), which is on the answer.
In the answer is it is calculated as 142x(1+(0.085+0.0025)/3)/(1+(0.022-0.0030)/3)…this confuses me.Thank you.
They are using the interest rate parity formula, and dividing by 3 because the interest rates given are yearly rates and they are getting a 4 months forward rate. So it is 4 months interest (or 4/12 of the yearly interest rates).
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