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Hi,
a company in UK is due to pay $s to a company in US in 5 months time. it is now 1st June. the forward rates are as follows;
3 month forward rate 1.9066-1.9120
1 year forward rate; 1.8901-1.8945.
examiner’s computation for 5 months forward rate: 1.9066*7/9 + 1.8901*2/9. sir, could you explain the sense behind this computation and the multipliers(2/9 and 7/9) in arriving at the 5 months forward rate?
thanks.He has apportioned between the two rate (although he does do it in a very odd way).
Given that there are. 9 months between the 3 month and the 1 year rates, and given that the 5 month rate is 2 months after the 3 month rate, a more logical way of getting the same results is:
1.9066 – 2/9 x (1.9066 – 1.8901) = 1.9029
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