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Sir, what is interpolated forward RATE? Kindly explain.
Sir, If spot rate is known i.e. 25 peso / $
and with the information in question we calculated forward rates by using PPP formula in one year as S1 = 46.73 peso/$ for one year
and we want what the rate will be in 6-months in order to calulate what will be the cost in six months so what we do?
published answer is: (25 + 46.73) /2
Sir, in Q: POLYTOT PLC – J04
1-year fwd rate : 1.5140 $/Pound
3-month fwd rate : 1.5362 $/Poundwe need 4-month fwd rate so this is done fwd interpolation which i can’t understand.
published answer is = 1.5362 – 1.5140 = 0.222
then,
0.222 x 1/9 = 0.0025
then,
1.5362 – 0.0025 = 1.5337 – i.e. the 4-month fwd rateSir in Q: Asteroid S -J08
1-month fwd rate : 1.6223 SFr/Euro
3-month fwd rate : 1.6176 $/Poundwe need 2-month fwd rate so this is done fwd interpolation which i can’t understand.
as Published answer is: (1.6223 + 1.6176 )/2 = 1.6199
Sir, kindly explain in easy steps that why the rates has been calculated in with different
methods in both of the above mentioned questions? I am confused.Three things:
Firstly, for forward rates we use interest rate parity. We use purchasing power parity (inflation) if we are forecasting future spot rates.
Secondly, just as if you were forecasting for 2 years time, you would multiply by ((1+Hc)/(1+Hb))^2; if you were forecasting for 6 months time (1/2 a year) you would multiply by ((1+Hc)/(1+Hb))^(1/2), which is another way of writing: square root of((1+Hc)/(1+Hb))
Thirdly, however, if you are interpolating it means that if (for example) you were given a 3 month forward rate and a 6 month forward rate, but you needed a 4 month forward rate, then you would approximate between the two as though it was a linear relationship.
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