Hi Sir, For question 1, I calculated 12 month forward exchange rate is 1.418 euro per 1$ by using the formula. But I don’t understand the question clearly. The Q is “Compared to making a dollar investment for 12 months, at what 12 month Forward exchange rate will the investor make neither a loss or a gain?”. I am wondering if 12 month forward exchange rate (resulted in as 1.418 Eu per 1$) is the Spot rate on the date of the end of 12 month period? How can we predict the spot rate on a specific date in 12 months? How can we know we don’t make neither a loss nor a gain when we use this 12 month forward exchange rate? Please advise!!! Thank you so much!!!

Could you please clarify this for me. On question 5, I get your POV that says if the euro has strengthened, it means you get more dollars for 1 Euro.

But is it also not the case that if the Euro has strengthened by 20%, you only need 80% of it to get a dollar. That is currently the spot is equivalent to €/$ 0.5. So 20% stronger gives €/$ 0.4, hence the total receivable becomes 1000*0.4=$400?

Hello Sir. I am asking if is there a difference between the exchange rate of R13.50/$,becasue if i appreciate the rand,say to R10.30/$,the rules that the export must be expensive in foreign country(as in your example) does not hold,please help.maybe I appreciate it in a wrong way.

Hi John, Just a doubt in q2 why we are using the interest rate parity to calculate the forward rate rather than purchasing power parity since both interest and inflatin rates are mentioned in the question. Thank You

As I explain in my free lectures, forward rates are always calculated using interest rate parity. Purchasing power parity is only used for estimating future spot rates.

Dear sir, could you please explain the logic of 1st question? The question said that investor should have the same fin.result (getting from conversion to euro, invest them and then convert back) as he could make dollars investment at 1,8%…

It is using the interest rate parity formula (which, as I explain in my free lectures, gives the forward rate and is equivalent to money market hedging).

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thuyly134 says

Hi Sir,

For question 1, I calculated 12 month forward exchange rate is 1.418 euro per 1$ by using the formula. But I don’t understand the question clearly. The Q is “Compared to making a dollar investment for 12 months, at what 12 month Forward exchange rate will the investor make neither a loss or a gain?”. I am wondering if 12 month forward exchange rate (resulted in as 1.418 Eu per 1$) is the Spot rate on the date of the end of 12 month period? How can we predict the spot rate on a specific date in 12 months? How can we know we don’t make neither a loss nor a gain when we use this 12 month forward exchange rate? Please advise!!! Thank you so much!!!

John Moffat says

The forward rate is the rate quoted now for converting in 12 months time. It is not the spot rate in 12 months time.

I do explain this in my lectures.

sushanth12 says

80percent

pratim says

In Q.5,

Euro Has Strengthened. Doesn’t It Mean That Just The Way €1 = $2.4, It Can Be Interpreted As €0.8 = $2 Also ?

goddish says

Hello Mr. Moffat,

Could you please clarify this for me. On question 5, I get your POV that says if the euro has strengthened, it means you get more dollars for 1 Euro.

But is it also not the case that if the Euro has strengthened by 20%, you only need 80% of it to get a dollar. That is currently the spot is equivalent to €/$ 0.5. So 20% stronger gives €/$ 0.4, hence the total receivable becomes 1000*0.4=$400?

Thanks

goddish says

Correction: €400 rather.

John Moffat says

You cannot have both of them strengthening!!

Currently €1 buys $2.

If the € strengthens by 20%, then 1 € will buy 20% more $’s. Therefore the new exchange rate will be such that €1 buys $2.40.

njivan28 says

Hello Sir.

I am asking if is there a difference between the exchange rate of R13.50/$,becasue if i appreciate the rand,say to R10.30/$,the rules that the export must be expensive in foreign country(as in your example) does not hold,please help.maybe I appreciate it in a wrong way.

John Moffat says

Assuming we are in the country that uses the Rand and are exporting to a country using the $, then exports certainly do become more expensive.

Suppose you export something for R100 to America. At the moment, the cost in $’s is 100/13.50 = $7.41.

If the exchange rate changes to R10.30/$, then the cost in $’s increases and becomes 100/10.30 = $9.71

poonamvimal says

Hi John, Just a doubt in q2 why we are using the interest rate parity to calculate the forward rate rather than purchasing power parity since both interest and inflatin rates are mentioned in the question. Thank You

John Moffat says

As I explain in my free lectures, forward rates are always calculated using interest rate parity. Purchasing power parity is only used for estimating future spot rates.

priyashju30 says

Hi sir

Q1

shouldn’t the ans be 1.415*((1.018)/(1.02))

= 1.412

as base is 2%

John Moffat says

No – the answer is correct. The exchange rate is quoted against the $, so $ is the ‘base’ currency.

Do watch my free lectures on this 🙂

kotylisi says

Dear sir, could you please explain the logic of 1st question? The question said that investor should have the same fin.result (getting from conversion to euro, invest them and then convert back) as he could make dollars investment at 1,8%…

John Moffat says

It is using the interest rate parity formula (which, as I explain in my free lectures, gives the forward rate and is equivalent to money market hedging).

zahidzafar says

sir may you explain question 2??

Why we are using both interest rate rather then one inflation of foreign country and interest of foriegn country.??

We are using both interest rate.??

John Moffat says

Forward rates are always calculated using the interest rate parity formula.

It would make no sense to use inflation rates and interest rates.

Have you watched the free lectures on this?

khanhhoangvu says

Dear Teacher,

Could you please to make my problem more clear that the interest rate quoted in question 1 is the deposit rate or borrowing rate?

Thank you Teacher very much

John Moffat says

This is exactly how the question appeared in the real exam – with only one rate of interest it is only that rate that you can use in the formula!

madihaf92 says

i got all the questions right. what an amazing teacher. god bless you Mr. Moffat

John Moffat says

Congratulations (and thank you 🙂 )

haidershah says

could you please explain this point that if euro is getting stronger by 20% then how come its becoming 1euro = $2.4

my answer is coming $2.5

= euro 2 / .8 = 2.5 which gives answer of 400euros

John Moffat says

At the moment, 1 euro buys $2

If the euro is 20% stronger, then it buys 20% more $’s. 20% x $2 = $0.4. So it now buys $2.40