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Sir, good day to you!
March/June 2016 exam, question 2 (Plam Co)
I’m confused about the answer of the question 2(b). When they calculate ‘Debt nominal value’, they used 300m pesos/56·585.
I don’t understand why they use six-month forward rate instead of spot rate to calculate the nominal value. Could you please help me out.. Thank you in advance!!To be honest in the middle of an exam I would probably have used the spot rate instead of the forward rate (and I would still have got most, if not all, of the marks for part (b) given that it is the discussion that gets the marks here).
However the reason the examiner used the forward rate is that it is the PV of the future interest payments that is more relevant, and the forward rates for future interest payments will keep moving in the same way due to the fisher formula (and the different interest rates for the two countries).
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