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Hello Sir, may I knw is there any inter
relationship between forward contract and money market hedge?
(except saying interest rate will affect the forward rate)thankss
In practice, the forward rates are determined by the banks by using the interest rates (i.e. the same workings as for money market hedging).
I do explain this in the free lectures. (The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.)
ya I undertand that forward rates is determined by interest rate. I am asking is there any other inter relationship except this?
How about like talking about demand and supply of currency, inflation rate and spot rate which will affect interest rate and eventually result in change in forward rate? Does this consider as inter-relationship?
Because as I knw the four-way equivalence: interest rate parity, purchasing power parity, the fisher effects and expectation theory that are inter-related to each other?
The only factor that directly determines forward rates is the relative interest rates for the two currencies.
Supply and demand for currency will affect the current spot rate but does not directly affect forward rates (because they are not traded instruments). Inflation rates affect interest rates and therefore indirectly affect the forward rates, but it is the interest rates that determine forward rates. Inflation rates are used to predict future spot rates.
Purchasing power parity is simply stating as a formula how inflation rates affect future spot rates. The Fisher formula is stating how inflation rates affect interest rates.
All of this is explained in detail in my free lectures on forecasting future spot rates, managing foreign exchange risk, and four-way equivalence.
The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
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