Ques -
Herd Co is based in a country whose currency is the dollar ($). The company expects to receive €1,500,000 in 6
months' time from Find Co, a foreign customer. The finance director of Herd Co is concerned that the euro (€) may
depreciate against the dollar before the foreign customer makes payment and she is looking at hedging the receipt.
Herd Co has in issue loan notes with a total nominal value of $4m which can be redeemed in 10 years' time. The
interest paid on the loan notes is at a variable rate linked to LIBOR. The finance director of Herd Co believes that
interest rates may increase in the near future.
The spot exchange rate is €1.543 per $1. The domestic short-term interest rate is 2% per year, while the foreign
short-term interest rate is 5% per year.
a) What is the six-month forward exchange rate predicted by interest rate parity?
Please help me in the above question , thanks in advance!
Ask the Tutor ACCA FM
forward exchange rate
You use the interest rate parity formula that is provided on the formula sheet (the very last formula on the page).
Because the question requires a 6 month forward rate you use the 6 monthly interest rates which are half of the annual interest rates given in the question.
I do illustrate how to use the formula in my free lectures!
okay got it , thanks :)
You are welcome :-)
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