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Fwd Rate MCQ

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Fwd Rate MCQ

  • This topic has 4 replies, 3 voices, and was last updated 10 years ago by John Moffat.
Viewing 5 posts - 1 through 5 (of 5 total)
  • Author
    Posts
  • June 5, 2015 at 6:12 am #253468
    olaniyi
    Member
    • Topics: 10
    • Replies: 20
    • ☆

    Pls,

    The current spot rate for $ against £ is $/£ 1.8420.

    Interest rate in U.S. is 5% p.a; whereas it is 4% in the UK.

    What would you expect the 3months forward rate to be?

    June 5, 2015 at 6:21 am #253471
    Salman
    Member
    • Topics: 7
    • Replies: 130
    • ☆☆

    Interest Rate Parity

    Fo = So x (1+ic)/(1+ib)

    Fo = Future Exchange Rate
    So = Spot Rate

    ib= Your Interest
    ic= Their interest

    So,

    Fo = 1.8420 x (1+0.04)/(1+0.05)

    Hence, Fo = 1.8244

    Am I correct? :/

    June 5, 2015 at 7:42 am #253500
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    Salman is not correct for two reasons.

    The interest rates given are yearly rates. For a 3 month forward rate you need to use 3 month interest rates. i.e. 3/12 x 5% = 1.25%; and 3/12 x 4% = 1%

    So the forward rate is 1.8420 x 1.0125/1.01 = 1.8466

    June 5, 2015 at 9:34 am #253530
    olaniyi
    Member
    • Topics: 10
    • Replies: 20
    • ☆

    Thank u sir

    June 5, 2015 at 10:46 am #253558
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    You are welcome 🙂

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    Posts
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