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casasophia june 11

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › casasophia june 11

  • This topic has 3 replies, 2 voices, and was last updated 6 years ago by John Moffat.
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  • May 24, 2019 at 6:19 pm #517188
    bik123
    Member
    • Topics: 57
    • Replies: 81
    • ☆☆

    Dear Tutor,

    could you advise in relation to casasophia why spot rate is predicted using inflation, and forward rates using interest rates? what is reasoning behind?

    By the way thank you for your help, your support for us- students is priceless.

    May 24, 2019 at 6:22 pm #517189
    bik123
    Member
    • Topics: 57
    • Replies: 81
    • ☆☆

    Sorry just found another post of yours with following explanation!

    For your second question, forward rates are always determined using interest rate parity.

    Expected future spot rates are always best estimated using purchasing power parity.

    May 24, 2019 at 6:26 pm #517191
    bik123
    Member
    • Topics: 57
    • Replies: 81
    • ☆☆

    But now I am wondering about following.

    For future cash flows they calculated forward rates, but for investment in 6 months they calculated spot rate, why spot rate not forward rate too?

    May 25, 2019 at 10:05 am #517272
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    It is because part (a) is asking about hedging a future receipt, whereas part (b) is not asking about hedging but for an estimate of the extra finance that will be needed.

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