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Sir plz tell me how forward exchange rate is calculated in f9 Exam Specimen in 2014. i have a little bit confusion of 0.5 in answer? is it for six month? if yes how calculated?
The forward rate is calculated using the interest rate parity formula.
The interest rates given in the question are the yearly interest rates (and are always given as annual rates) and so the six-monthly rates are the annual rates x 6/12 (or divided by 2).
Strictly, the line of the answer starting ‘alternatively’ is the correct one.
(
What is on the first line of the answer is saying that it should be the square root of the yearly rates (again, because there are two x 6 months in a year. This is not actually how it works, although the answer comes to the same and so it is not a problem.)
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