hi sir, i have doubt in this qstn.
The current spot exchange rate between sterling annd the euro is 1.445/sterling.
the sterling annual int rate 5.75% and the euro annual int rate is 4.75%.
what should be 3 months forward rate ?euro/sterling
ANS what i did is
sterling = 5.75*3/12 = 1.4375
euro = 4.75*3/12 = 1.1875 but the calculation for euro (0.0475/4) = 1.458.62
but i dont get it how they get 145.872 for euros?
can you plz explain me. thank u in advance
Ask the Tutor ACCA FM
risk mangt topic
4y ago#1Given that the current spot rate is 1.445, it would be completely impossible to end up with a forward rate of 145.872 !!!!
It seems that either there is an error in your book or you have not copied the question correctly (the current spot rate would normally be quoted to 4 decimal places as not 3 decimal places).
On the figures that you have typed:
The sterling 3 month interest rate is 1.4375%, which is 0.014375
The euro 3 month interest rate is 1.1875%, which is 0.011875
Using the interest rate parity formula provided on the formula sheet:
The 3 month forward rate is 1.445 x (1.014375 / 1.011875) = 1.449
hi sir, but the correct answer is 1.4379
here is the solution which is given in kaplan book.
sterling 3 months 5.75% = 0.0575/4 = 1014.375
euro 3 months 4.75% = 0.0475/4 = 1458.62 they get this figure when calculating euro
forward rate = 1458.62/1014.375 = 1.4379
4y ago#3Well there is clearly an error in the Kaplan answer because 0.0475/4 does not equal anything like 1458.62 !!
What I wrote in my previous reply is correct.
Sign in to reply to this topic.