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The current spot rate for the peso (the currency of country P) to the $ (the currency of country A) is
2 peso: $1. Annual interest rates in the two countries are 8% in country P, and 4% in country A.
What is the three months forward rate (to four decimal places) in terms of peso to the $ ?
my ques – Why are they dividing it by 4 in the below answer? like why quarterly?
The quarterly rates are: Country P: 8%/4 = 2%; Country A 4%/4 = 1%
The three month forward rate is the rate for 3 months from now and depends on the interest rates for 3 months.
The interest rates for 3 months are 3/12 (i.e. 1/4) of the annual interest rates (in exactly the same way and for the same reason as we do the same thing in money market hedging).