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Please help me understand why exchange rate has been calculated by examiner in this manner
Spot rate × (1+(baserate+premium)/3/(1+baserate+premium)/3
Kindly tell me if there’s any other way of getting to that figure ?
Moreover this question seems pretty confusing .. can u please guide How I can make it simple for myself to handle this ?
It is the forward rate that he has calculated that way (not the spot rate).
Forward rates are determined by the relative interest rates and he has used the interest rate parity formula (from the formula sheet). Dividing my 3 is simply because they were yearly interest rates, but we need the forward rate in 3 months – 1/3 years.
There is no other way (apart from deriving the interest rate parity formula yourself.
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