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John,
Forgive me for this rather late question, and I can’t quite believe I’ve not noticed this until now but why do we divide the interest rates in the question into quarterly rates if they are already provided at 3 month equivalent rates.
For example:-
P is due to receive $5m in 3 months time
Spot $/£ 1.5384 – 1.5426
Current 3 month interest rates are:-
US Prime 5.2% – 5.8%
UK LIBOR 3.6% – 3.9%An obvious oversight on my part, not thinking that straight just now.
Thanks
Sorry, I meant to add….
I assume interest rates will always be quoted as annual rates hence the division into 3m, 6m etc, I just wanted to be sure.
If they were not quoted as annual rates how would the examiner quote them?
Thanks
They are always quoted as annual rates. (It is just that the annual rate the banks quote will differ depending how long the deposit/borrowing is for).
So if the US rate is 5.2% for 3 month deposits, it means that if you deposit for 3 months the rate is 5.2% per annum, and so the actual interest you will get for the 3 months is 3/12 x 5.2%.
(For 6 month deposits the bank might quote (say) 5.4% per annum, and so if you were depositing for 6 months the actual interest would be 6/12 x 5.4% )
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