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Dear Sir,
I’m sorry for asking this silly doubt at this moment where we have hardly 2 days for the exam but my doubt is that as in applying interest rate parity to know the forward rate after 3 months, we divide the annual interest rate by 4. Do we do the same (i.e. dividing annual inflation rate by 4) in applying PPPT to estimate future spot rate after 3 months.
Thank you in advance.
Regards,
Rajvir Singh Oberai.You would, but it would be very strange for you to be asked to forecast the spot rate after 3 months. I don’t think it has ever been asked!
The only time you are likely to need to forecast spot rates is when it is an investment appraisal question and the investment is in another country. Then the remittances to the home country need converting. But since they will be in 1, 2, 3, etc years then it is only the forecasts for 1, 2, 3 etc years that are needed.
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