F9 Specimen Exam MCQ #1

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September 1, 2016 at 1:17 pm #336817
wtburke
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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?
September 1, 2016 at 6:48 pm #336880
John Moffat
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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.
August 30, 2022 at 5:06 pm #664693
maximus07
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Why we are not using Purchasing power parity?
August 30, 2022 at 5:37 pm #664697
John Moffat
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Purchasing power parity is used to forecast a future spot rate.

This question asks fort he forward rate, and forward rates are determined using interest rate parity as I explain in my free lectures.
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