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Forward rates when interest rates and inflation rates are involved

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Forward rates when interest rates and inflation rates are involved

  • This topic has 5 replies, 2 voices, and was last updated 3 years ago by John Moffat.
Viewing 6 posts - 1 through 6 (of 6 total)
  • Author
    Posts
  • December 9, 2021 at 4:12 pm #643450
    alxstellini
    Participant
    • Topics: 3
    • Replies: 2
    • ☆

    Dear John,
    I came across a question involving both interest rates and inflation rates in the calculation of the forward rate, and no matter what I did, I could not arrive at the examiners answer. How does one calculate such a question?
    Thank you

    December 9, 2021 at 5:19 pm #643492
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54665
    • ☆☆☆☆☆

    The forward rate is always determined by using the interest rate parity formula that is provided in the exam.

    Unless stated otherwise in the question, the interest rates given will be annual rates, so if (for example) you are calculating the 3 month forward rate you need to divide the annual rates by 4.
    Maybe this is where you went wrong? However I cannot explain more without obviously seeing the question.

    December 9, 2021 at 5:49 pm #643513
    alxstellini
    Participant
    • Topics: 3
    • Replies: 2
    • ☆

    The home currency of ACB Co is the $ and it trades with a company in a foreign country whose home currency is the dinar, The following information is available:
    Spot Rate = 20 Dinar per $
    Int rate – Home Country = 3% p.a. – Foreign Country = 7% p.a.
    Inf rate – Home Country = 2% p.a. – Foreign Country = 5% p.a.

    What is the 6 month forward exchange rate?

    December 10, 2021 at 8:40 am #643665
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54665
    • ☆☆☆☆☆

    The 6 month rates are 1.5% and 3.5%

    Therefore the forward rate is 20 x 1.035/1.015 dinars to the $

    December 10, 2021 at 5:44 pm #643767
    alxstellini
    Participant
    • Topics: 3
    • Replies: 2
    • ☆

    Thank you 🙂

    December 11, 2021 at 11:17 am #643876
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54665
    • ☆☆☆☆☆

    You are welcome 🙂

  • Author
    Posts
Viewing 6 posts - 1 through 6 (of 6 total)
  • The topic ‘Forward rates when interest rates and inflation rates are involved’ is closed to new replies.

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