Hello Sir,
I have been given two forward exchange rates in this question which are as follows:
One year rate- 1.8901
3 month rate- 1.9066
And I need to calculate the 5 month forward exchange rate which I am confused how to.
In the answer, this is how they have calculated:
(1.9066*7/9)+(1.8901*2/9)=1.9029
Can you please explain the logic behind this?
Thanks.
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Lammer plc, june 2006
5y ago#1The answer is just apportioning between the two rates.
I think it is more obvious to do it the following pay:
There are 9 months between the one year rate and the 3 month rate.
There are 2 months between the 5 month rate and the 3 month rate.
So the 5 month rate = 1.9066 - 2/9(1.9066 - 1.8901) = 1.9029
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