Casasophia

You must not post links to pirate websites. They are hosting the questions illegally because the questions and answers are the copyright of the ACCA.
I have my own copies of past exam questions and so if you ask about any other questions just give me the date of the exam and the name of the question.

1. We never take the average spot to calculate the forward rate. The forward rate will have a spread just as the spot does. Here they are receiving MShs each year and are therefore selling MShs to convert to €’s, so the relevant rate to use is 128. (Were they paying MShs then we would use 116).

2. The new project is going to commence in 6 months time, and therefore the income will be received in 1.5 years, 2.5 years, and 3.5 years. We need first to calculate the exchange rate in 0.5 years to be able to calculate the three rates that we need to use.

3. Forward rates are always determined by the interest rates (in real life as well as in exams). (Inflation rates are used in PPP to estimate future spot rates.)

4. They are using forward rates because that then fixes the income for each of the three years. They could instead not use forward rates and convert the receipts at whatever the spot rate turns out to be in each of the three years. Since the future spot rates are determined by the inflation rate, then if the level of inflation falls, the future spot rates will not fall as much as it will if it stays at 9.7% and therefore the income in €’s will be higher than if inflation stayed at 9.7% (or increased).

You are welcome 🙂