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i am not happy with case 1 forward rate and option borrowing calculation and why borrowing itss investment
Well I don’t know what you expect me to do, unless I know what you are not happy about!!
I assume that you have watched all of my free lectures on foreign exchange and interest rate risk management? In which case, be specific about what you are not clear about in the answer to this question.
heyy john sorry my bad
Forward rate = 142 × (1 + (0.085 + 0.0025) / 3) / (1 + (0.022 – 0.0030) / 3) = 145.23
why divisable by 3???
It is assumed that the funds for this cost need to be borrowed, so this cost is multiplied by the borrowing rate for the total cost , its investment why borrowing rate?????
€48,601 × (1 + 0.037/3) = €49,200
I wrote in my previous post that I assumed you had watched my free lectures, but it seems that you have not done!! 🙂
For your first question, as I state in my lectures, interest rates are always annual rates unless told otherwise. Here, the transaction is in 4 months time and so the relevant interest rates for the forward rate formula are 4/12 of the annual rates (which is the same as 1/3).
For your second question, they are having to wait 4 months before they receive the money. As a result they are either having to borrow money to cover them for those four months, or if they already have plenty of cash then they are losing interest for the four months that they could have earned had they not had to wait. As is stated in the examiners answer, you could therefore use either rate depending on what you assumed (and as always in the AFM exam, you must state your assumptions).