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