Qs 4 pault .Sept/Dec 2016

No - it is not interest rate parity (it is based on a technical article on the ACCA website. Suppose you invested $100 for 2 years using the yield curve rate of 4.25%. It would grow to 100 x 1.0425^2 Suppose instead you invested the $100 for 1 year at the one year rate (3.70%) and then for a further year at the 2 year forward rate of R. The $100 would grow to 100 x (1.037) x (1+R). So....100 x 1.037 x (1+R) must be equal to 100 x 1.0425^2 Therefore 1.037 x (1+r) = 1.0425^2 1+r = 1.0425^2/1.037 R = (1.0425^2 / 1.037) - 1 It is the same logic for the other rates.