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Sir i have come across a question where we have to calculate inflation rate in foreign country using forward contract rates.(formula surely will be PPPT).home.currency inflation rate is given.
My question is as we have to calculate (1+hi) figure.what figures will be used for Si and So if
Forward rate for 12 months= 4.723-4.725Similar for interest rate if we have to calculate foreign currency interest rate.(using IRPT) what figures can be used for Si and So from forward contract (using the same figures above for forward contract)
ThanksFirstly, forward rates are always calculated (in real life as well as in exams) using interest rate parity. Purchasing power parity is used for forecasting future spot rate.
With regard to the symbols, Hb and Ib are the inflation or interest rates in the base country, and Hc and Ic are the inflation or interest rates in the other country.
The base country is the country against which the other countries currency is being quoted against.
So, for example, if you are given a $/€ exchange rate, then € is the base county and $ is the other country.
This is all explained, with examples, in my free lectures. The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
They mention them because you are expected to be able to use purchasing power parity and interest rate parity in the exam 🙂
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