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hello
reagrding part b I do not understand that why the forward rate for MSh 2.64 deposits is calculated using purchase power parity whilst forward rate for MSh income of 1.5 is calculated using purchase power parity I do understand that for income it is written in the question to use goverment base rate but what about deposit?
thank youForward rates are always calculated using interest rate parity (in real-life as well as the exam).
If you are forecasting a future spot rate (which is not the same thing as a forward rate) then we use inflation rates to get the best forecast (even though obviously lots of other factors may effect it which we are not able to forecast).
This is what the examiner has done in this question.
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