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in section b) we calculated and obtained the forward exchange rates for 6 months from now using interest rate parity formula.
however, to get the expected spot rate in 6 months time, the examiners did an purchasing power parity formula to get the expected spot rate.
my question is why did they need to do a PPP? in my understanding a 6 month forward rate should be assumed to be the spot rate in 6 months time.
( we use this assumption when dealing with future derivatives, so why not now?)Forward rates are always calculated (in real life as well as in exams) using interest rate parity.
Purchasing power parity is used in exams to forecast future spot rates.
We never assume that the spot rate on a future date will be equal to the forward rate – there is no reason at all why that should be the case and we do not make that assumption when dealing in futures.
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