Foreign exchange risk — OpenTuition Forums

SSimon10y ago

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

SSimon10y ago#1

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

John MoffatTutor10y ago#2

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% )

SSimon10y ago#3

Thanks John, I feel I confident about this section of the exam now.

John MoffatTutor10y ago#4

Great :-)

Sign into reply to this topic.