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F9 Specimen Exam MCQ #1
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?Answer is: 20 x (1·035/1·015) = 20·39 Dinar per $
How are they getting these numbers?
They are using the interest rate parity formula that is on the formula sheet.
The interest rates given are yearly interest rates, and so the six-monthly rates (because we want a six month forward rate) are half of the yearly rates.
Have you watched my free lectures on this? My lectures are a complete free course for Paper F9 and cover everything necessary to be able to pass the exam well.
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