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hoping someone can clarify this for me. i’ve been looking at a few MCQ’s for this and my notes from college seem to be different compared to questions in the revision book for Becker. In my revision notes from college the formula is: Spot x 1 + int rate home/1 + int rate foreign
Question to start off with – does “home” mean Home Country OR Home Currency? As an example this is Q14.9 on pg 29 of the RQB from Becker on Risk.
The Home currency of GB Co is Sterling (£) and it trades with a company in a foreign country whose home currency is the rupee. The following information is available:
Home Country Foreign Country
Spot Rate 80.00 rupees per £
Interest Rate 2% per year 9% per year
Inflation Rate 1% per year 5% per yearWhat is the two-year forward exchange rate?
So, using the formula per my notes, I’m taking the HOME interest rate as the 2% (forgetting about working out the 2 years for now) and i’m taking the FOREIGN interest rate as the 9%. but the solution has the 9% rate on the top (as home) and the 2% rate on the bottom (as foreign). so going by this, are we supposed to translate HOME in the formula as the home currency as opposed to the Home Country? I think our lecturer said this was just a sneaky way to state the question but it’s completely confusing me?
Thanks a lot
Erin.When you ask in this forum, then the ‘someone’ will always be me (because I am the tutor for F9) 🙂
It would seem that your notes from college are wrong, because the Becker answer is correct.
The formula is given on the formula sheet you are given in the exam, and is
Fo = So x (1+Ic)/(1+Ib).
Ib is the ‘base’ country which is the country whose currency the exchange rate is being quoted against. What I mean by that is that if it is Rupees per Pound, then the country using Pounds is the base country. If the rate is quoted as Pounds per Rupee, then the country using Rupees is the base country.
Ic is the other country 🙂It will help you to watch my free lectures on this. It may be obviously a bit late now, but my lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.
Ah thanks John ? it’s never too late- I might just check out your lecture over next few days as it was frustrating me today that I was seeing conflicting workings in the notes and books I was working off- thanks for clarifying that for me
I also meant to add- I’ve listened to many of your lectures on F9 during my morning and evening commutes to work and I found them extremely helpful on top of my other online lectures with my college in dublin- I liked your humour as well ? thanks again
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