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.
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casasophia june 11
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.
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?
7y ago#3It 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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