Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Interest rate parity
- This topic has 5 replies, 2 voices, and was last updated 7 years ago by John Moffat.
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- November 29, 2016 at 4:11 pm #352403
Hello John,
2014, December, question 3b
I don’t understand how the examiner arrived at 4.3132 in calculating the implied annual interest rate of the overseas country
November 29, 2016 at 5:32 pm #352427I am not sure which bit of the answer you are not clear about.
The interest rate parity formula gives the forward rate when the know the relative interest rates and the spot rate.
In this question, we know the spot rate, we know the forward rate, we know the interest rate in PZK’s country, and so we can use the formula to calculate what the interest rate must be in the other country.
November 30, 2016 at 2:11 am #352477I understand everything you said and using the formula. What I don’t understand is the math behind finding the unknown numerator.
November 30, 2016 at 5:50 am #352494Fo = So x (1 + ic) / (1 + ib)
So 4.3132 = 4.2080 x (1 + ic) / 1.04
Multiply both sides by 1.04:
4.3132 x 1.04 = 4.2080 x (1 + ic)
Divide both sides by 4.2080″
(4.3132 x 1.04) / 4.2080 = 1 + ic
1.066 = 1 + ic
Subtract 1 from both sides:
0.066 = ic (or ic = 6.6%)
November 30, 2016 at 8:17 pm #352687Thank you.. Cleared
December 1, 2016 at 6:37 am #352750You are welcome 🙂
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