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sir if we have been given spot rate, 1year forward rate and interest rates in both countries of transactions. in such a case if we need 6moths forward rate,
do we interpolate?
or we use interest rates, which if say is x% then spot rate x (1+x%x6/12) would be our 6months forward rate?
As per my understanding, we interpolate.
Interest rate parity is used to cal exchange rates say after 1 year. They are not to be used for cal of Forward market rate.
For interpolation refer asnwer to Question- LAMMER PLC.
parthbhanushali: Please do not answer in this forum because it is the Ask the Tutor Forum, and you are not the tutor (but please do help people in the other Paper AFM forum) 🙂
Jiya024: Forward rates are always (in real life and in the exams) determined by the interest rates in the two countries and so we use the interest rate parity formula.
In Lammer (the question the previous poster refers to, but which is a very old question set by the previous examiners) then you could use the interest rate parity formula to calculate a 5 month forward rate, but because the question does give the 3 month and 6 month forward rates, it is quicker and easier just to interpolate between them to get the 5 month rate.
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