- This topic has 3 replies, 2 voices, and was last updated 7 years ago by
.
- Posts
Hello Mr. Moffat,
I do apologise in advance as I have two questions.
1. when hedging against the interest rate risk and we use future, If I expect the future interest is going to rise the best action is to sell future now and buy in the future. but I am not entirely sure as what to do if the interest rate is expected to go down, do we buy now and sell in the future or we do nothing?
2. when forecasting the future exchange rate, to my understanding that if it the information is given for a short period of time ( 6 months, for instance) I should use the interest rate parity to forecast the exchanged rate and if the information is given for a year I should use the purchasing power parity to forecast the exchange rate is that a correct statement?
your help is very much appreciated in advance.
Regards
1. Interest rate futures are quoted as 100 minus the interest rate.
(So 10% interest is equivalent to a futures price of 90).
If the interest rate goes up then the futures price falls, and vice versa.2. Interest rate parity is used to calculate forward rates. Purchasing power parity is used to forecast future spot rates.
Both of your questions are explained in detail (with examples) in my free lectures.
The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.
- The topic ‘purchasing power parity and future’ is closed to new replies.