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Sir!
my understanding of this question is as follows:
1. even though PPPT is a better predictor or fx rates, we are given a range of fluctutation of inflation for the Mazabian country that is why we can not use PPP. correct?
2. since we are given base rates, we use IRP. correct?
3. as for a swap offer, the forward rates which will be offered by the bank are more like OTC forward contracts. How the bank calculates the rate it will offer is of no concern to us. the only advantage of the swap will be knowing what the fixed rates are. correct?
4. if the bank did use IRP, they wd get the same rates as we got when doing the NPV. correct?
regards and thank u in advance!! .. 🙂 since u close the threads i dont get a chance to say thank u..but saves time tho…:)
A lot of this question depends on the assumptions you make (and, as always, provided you state your assumptions you still get the marks even though you end up with different figures).
1 Correct – inflation rates are the better predictor of spot rates (whereas interest rates determine the forward rates). As you have written, the problem here is that the future inflation rates are so uncertain.
2. Yes (following on from (1))
3. Correct
4. Correct
🙂
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