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i want to calculate the forward rate in my country,(Nigeria) i have the following information which i want to use calculate it
Current spot rate : N302.34 : 1 Pounds
Inflation rate in UK : 1.9%
Inflation rate in Nigeria: 8.6%Want to calculate the Exchange rate and value of 1 pounds to Naira
302.34 = 1.086/1.019
Exchange rae in Nigeria = 322.21 to 1 Pounds?Is this correct?
No – it is not inflation rates that determine forward rates. Interest rates determine forward rates (and you headed up this post IRP which stands for interest rate parity).
If the rates that you have typed are interest rates (not inflation rates) then your calculation is correct (assuming that you are wanting a forward rate for 12 months time.
If on the other hand you are trying to forecast what the exchange rate will be in one years time, then you use inflation rates (and again your calculation would then be correct). However a forecast/prediction of the spot rate in one years time is not the same as a forward rate.
I do suggest that you watch the free lectures on foreign exchange risk management and on forecasting exchange rates.
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