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How is the forward rate calculated? Why did they use the country base rates to calculate forward rates?
Forward rates are always determined (in real life as well as in exams) by using the interest rate parity formula that is provided in the exam.
I do explain this (and the logic) in my free lectures.They are buying a call option at 84 and the premium given in the question is LL4 per $.
The total amount they are buying the option on is LL357m/84 = $4,250,000.
So the total premium payable is 4,250,000 x 4 = LL17m
This is converted to $’s at the current spot rate of 84.
Greeting Mr John
Hope you are having a good day.
with regards to this question, while calculating the forward rate using interest rate parity why have they divided both the interest rate by 3. it at all its months then it should be 4 rather than 3.
OTC forward rate 84.00 × (1 + (0.06 + 0.0060)/3)/(1 + (0.033 – 0.0030)/3) = 85.00 approx
Pls guide
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