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since asteriod is receiving money from swiss its reverse money market
euro [ pv ]……………………………………………. [ fv ]
deposit <———————————- 1.5 euros
. { x * 2/12}
;
\ / { * 1.6199}
borrow X {1+2.17} X
(CHF)Shouldn’t flow be like this (money market hedge )
here borrowing rate of CHF is directly given 2.17 then why we are finding out interest rate overseas using forward rate formula ???arent we supposed to find out interest rate in base country? as deposit rate of euro not given
flow :
1) deposit euro
2)convert to present value euro currency by 2 mon interest of euro which is unknown 😕
3)multiply by spot rate given to get CHF currency
4)convert borrowed chf in chf borrow interest rate for two months to get future value !!am i right regarding the above flow ?-reverse money market! :/
As I explain in my lectures, forward rates are determined by the interest rates – the banks use the money markets in order to be able to arrive at a forward rate to quote to customers.
The question does not ask you to illustrate using the money markets, it just asks for the acceptable interest rate which can be calculated (as in the answer) using the formula on the formula sheet for the forward rate calculation (which is itself effectively using the money markets).
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