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Hi,
Is the formula Forward Rate = Current Spot Rate[1+inflation in the home country / 1+ inflation in the second country)]
In the BPP kit it is the other way around but i always thought it was the above,
Thanks
BPP are correct (and it is the same as I say in the free lecture also).
However, in deciding which country is which, it depends which way round the currencies are quoted.
If the quote is (for example) US$ to the GBP, then the ‘home’ country (on the bottom of the equation) is GBP and the ‘other’ country (on the top of the equation) is US$.
However if the quote is GBP to the US$, then the ‘home’ country (on the bottom of the equation) is US$ and the ‘other’ country (on the top of the equation) is GBP.
If quoted as GPB 0.1430 = $1, thereby the home country is Dollar and other country is GPB. The value “1” relfects that it is the home country, is it right? Thanks.
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