FM Chapter 22 Questions – Forecasting foreign currency exchange rates
Reader Interactions
Comments
Leave a Reply
You must be logged in to post a comment.
Free ACCA & CIMA online courses from OpenTuition
Free Notes, Lectures, Tests and Forums for ACCA and CIMA exams
20% off ACCA & CIMA Books
OpenTuition recommends the new interactive BPP books for March and June 2025 exams.
Get your discount code >>
Hello Sir
In question 1, how fall in country’s exchange rate will cause rise in domestic inflation rate and exports ?
My understanding is when domestic currency exchange rate falls, domestic currency strengthens ,which leads to fall in inflation rate.
Please correct me if I am wrong.
If (for example) the Pound falls against other currencies then it means that exports priced in Pounds are cheaper for foreign countries and so exports will increase. However it means that imports from other countries are more expensive and this leads to inflation.
Why do the ACCA questions not use a simpler format, where for example USD/EUR 1.50. Where 1 USD is 1.50 EUR? Isn’t this the standard around the world?
I don’t see that it is any simpler, and there is no world-wide standard – different countries and different banks quote in different ways.
it cannot be – The USD is the BASE as EUR is 1.20 – Therefore the equation should be 1.20 x ( 1.04/1.06)^2. Or the original Spot rate needs to be worded more clearly as its very easy to misread that. $ 1: EUR 1.2
I assume that you are referring to question 2, in which case both the question and the answer are correct. As is made perfectly clear in our free lectures, if the exchange rate is quoted as $/€ 1.20 in the exam then it means 1.2$’s are equal to 1€. The $ is not the base at all – the € is the base currency!!
80percent
Dear Mr John,
Can I ask:
in Q1 why the domestic rate will fall?
in Q5 why the “Inflation rates are a better predictor than interest rates of future exchange rates” and why not compared to forwards?
Thanks in advance
Q1. Because imports from other countries will be more expensive
Q5 I do explain both of these in my free lectures on this
In question 1, what does it mean by a country’s exchange rate? I mean the answer depends on the way they quote the exchange rate.
Hi Sir,
For question number 2, shouldn’t it be € as the counter currency? and $ is the base? if so then isn’t it 1.04/1.06?
Thank you!
No.
The dollar is quoted against the euro, and so the euro is the base country.
The answer is correct 🙂
In simple english or easy mathematical formular,what does it mean that it is quoted against the Euro?
it cannot be – The USD is the BASE as EUR is 1.20 – Therefore the equation should be 1.20 x ( 1.04/1.06)^2.
Dear sir, could you please explain last (5) question?
What is difference between future and forward exchange rates
Thank you
Future exchange rates are estimated future spot rates.
Forward exchange rates are rates quoted now for exchanging on a fixed future date.
I do suggest that you watch my free lectures on this.
Dear sir, Thank you so much for your lectures and answers but i am still kind of mess on 5 question (i watched videos and read lectures 22 and 23 to understand… and still can not understand why inflation rates are better predictor than interest rates for future exchange rates and why it is not working for forward exchange rates
May be i missing something?
Thank you already in advance
Future spot rates and forward rates are two different things.
Lots of things affect future spot rates, but inflation rates are regarded as being the indicator as far as the exam is concerned.
Forward exchange rates are quoted by the bank. They are taking the money and using the money markets with the money, and therefore the rates they quote are purely determined by the interest rates.
hello sir
in question number 1,
what does it mean by export will be stimulus if exchange rate is falling down?
It means that exports will increase (because the cost to people in other countries will be lower because of the lower exchange rate and therefore they are likely to want to buy more).
Kindly guide me to question 2
Sol : (1.06/1.04) power 2 x 1.2 = 1.246 or 1.25 [ by using Interest rate parity formula ]
Horiph is correct.
I do suggest that you watch our lecture on this, because I work through an almost identical example.