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Dear John,
I came across a question involving both interest rates and inflation rates in the calculation of the forward rate, and no matter what I did, I could not arrive at the examiners answer. How does one calculate such a question?
Thank youThe forward rate is always determined by using the interest rate parity formula that is provided in the exam.
Unless stated otherwise in the question, the interest rates given will be annual rates, so if (for example) you are calculating the 3 month forward rate you need to divide the annual rates by 4.
Maybe this is where you went wrong? However I cannot explain more without obviously seeing the question.The home currency of ACB Co is the $ and it trades with a company in a foreign country whose home currency is the dinar, The following information is available:
Spot Rate = 20 Dinar per $
Int rate – Home Country = 3% p.a. – Foreign Country = 7% p.a.
Inf rate – Home Country = 2% p.a. – Foreign Country = 5% p.a.What is the 6 month forward exchange rate?
The 6 month rates are 1.5% and 3.5%
Therefore the forward rate is 20 x 1.035/1.015 dinars to the $
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