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Pault Co (sep/dec 16)

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Pault Co (sep/dec 16)

  • This topic has 3 replies, 2 voices, and was last updated 6 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • August 9, 2018 at 8:30 pm #467133
    fahad132
    Participant
    • Topics: 32
    • Replies: 20
    • ☆☆

    part(a)

    i have learnt the technique by rote but please assist me how to use the forward exchange rate using formula in this context of swap as it looks different than what we have done using exchange rate.

    Year 2 forward rate: (1·04252^2/1·037) – 1 = 4·80%
    Year 3 forward rate: (1·04703^3/1·04252^2) – 1 = 5·61%
    Year 4 forward rate: (1·05104^4/1·04703^3) – 1 = 6·31%
    Rates are reduced by 20 basis points in calculation.

    August 10, 2018 at 6:37 am #467159
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    These are not forward exchange rate – they are forward interest rates!!

    The question is based on one of recent technical articles on the ACCA website.

    If you borrow $100 for 2 years at the spot yield rate of 4.25% per year, then after 2 years you would end up owing 100 x (1.0425^2)

    If you borrowed $100 for 2 years with the first year being at the spot yield rate for 1 year of 3.70%, and the second year being at a 2 year forward rate of r%, then after 2 years you would be owing:
    $100 x 1.037 x (1+r)

    Therefore 1.037 x (1+r) = 1.0425^2

    r = (1.0425^2 / 1.037) – 1 = 0.048 (or 4.80%)

    It is the same workings for the other rates.

    August 10, 2018 at 7:53 am #467167
    fahad132
    Participant
    • Topics: 32
    • Replies: 20
    • ☆☆

    Thank u so much sir you made it very clear to me.

    August 10, 2018 at 3:23 pm #467221
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    You are welcome 🙂

  • Author
    Posts
Viewing 4 posts - 1 through 4 (of 4 total)
  • The topic ‘Pault Co (sep/dec 16)’ is closed to new replies.

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