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kaplan exam kit 2015 q20

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › kaplan exam kit 2015 q20

  • This topic has 5 replies, 2 voices, and was last updated 5 years ago by John Moffat.
Viewing 6 posts - 1 through 6 (of 6 total)
  • Author
    Posts
  • June 15, 2019 at 1:38 pm #520535
    ishmero2006
    Participant
    • Topics: 9
    • Replies: 5
    • ☆

    How did they arrive at the UK rates of 8.25% – 8.5% using the interest rate parity expression given in the answer?

    June 15, 2019 at 2:45 pm #520542
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54679
    • ☆☆☆☆☆

    I do not have the Kaplan Exam Kit, only the BPP Revision Kit.

    If it is a past exam question, then tell me which exam sitting and the name of the question – then I will be able to find it. Otherwise I am sorry but I cannot help you.

    June 16, 2019 at 2:31 pm #520595
    ishmero2006
    Participant
    • Topics: 9
    • Replies: 5
    • ☆

    IThe name of the question is Somax Plc.
    Extract: Somax wants to raise funds in Swiss francs for a project.
    Exchange Rates
    Spot. Sfr 2.3245 – 2.3300/E
    6m foward Sfr 2.2955 – 2.3009/E

    Somax can borrow in Sfr at floating rate of between 5.75% and 6% depending on which form of borrowing is selected(is in the Euro market or the Swiss domestic market).
    Sfr Libor is currently 5%.
    The interest rate parity theorem may be assumed to hold.
    Question:
    Estimate the UK sterling cost of capital that Somax should use as the discount rate for its investment in Switzerland.
    In their solution they gave the following expression based on the interest rate parity theorem and the mid rate exchange rates;
    2.2982= 2.3273X(1+Swiss rate)/(1+UK rate).
    They worked this out to get UK rate of 8.25% – 8.5% per annum which I don’t understand.

    .

    June 16, 2019 at 3:56 pm #520598
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54679
    • ☆☆☆☆☆

    I think you are happy with the actual interest rate parity theorem as you have written it.

    However because that is the formula for the 6 month forward rate, you need to use the 6 month interest rates of 5.75/2 = 2.875% and 6/2 = 3%.

    It still does not give exactly the answer that you have given from Kaplan (maybe there is a typing mistake, or they have rounded) but it is close enough.

    For a half year rate of 3%, the formula becomes:

    2.2982 = (2.3273 x 1.03) / (1 + UK rate)
    Therefore 1 + UK rate = (2.3273 x 1.03)/2.2982 = 1.043

    So the six monthly UK rate is 0.043 or 4.3%, and therefore the annual rate is 8.6%

    Same approach for a half year rate of 2.875%

    June 16, 2019 at 11:03 pm #520620
    ishmero2006
    Participant
    • Topics: 9
    • Replies: 5
    • ☆

    Thank you very much. I think I get it now from your explanation.

    June 17, 2019 at 8:25 am #520632
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54679
    • ☆☆☆☆☆

    You are welcome 🙂

  • Author
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Viewing 6 posts - 1 through 6 (of 6 total)
  • The topic ‘kaplan exam kit 2015 q20’ is closed to new replies.

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