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bpp revision kit question

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › bpp revision kit question

  • This topic has 1 reply, 2 voices, and was last updated 7 years ago by John Moffat.
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  • Author
    Posts
  • September 1, 2017 at 9:57 am #404823
    mracca11
    Member
    • Topics: 20
    • Replies: 6
    • ☆

    The home currency of ACB Co is the dollar ($) and it trades with a company in a foreign country whose
    home currency is the Dinar. The following information is available:
    Home country Foreign country
    Spot rate 20.00 Dinar per $
    Interest rate 3% per year 7% per year
    Inflation rate 2% per year 5% per year
    What is the six-month forward exchange rate?
    A 20.39 Dinar per $
    B 20.30 Dinar per $
    C 20.59 Dinar per $
    D 20.78 Dinar per $

    I got an answer of (D), whereas the correct answer is (A), and the revision kit didnt give any explanation to it. kindly if you could just put down the workings of how to arrive at 20.39 Dinar per $ and how.

    Thanks alot Sir.

    September 1, 2017 at 11:34 am #404841
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54662
    • ☆☆☆☆☆

    Since the question wants the forward rate, you use the interest rate parity formula.

    The six-monthly interest rates are 1.5% and 3.5%.

    So the forward rate is 20.00 x (1.035/1.015) = 20.39

    You used the yearly interest rates 🙂

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