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risk mangt topic

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › risk mangt topic

  • This topic has 3 replies, 2 voices, and was last updated 1 year ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • August 12, 2021 at 4:56 pm #631372
    cadhakan
    Member
    • Topics: 71
    • Replies: 123
    • ☆☆

    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

    August 13, 2021 at 8:38 am #631408
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51560
    • ☆☆☆☆☆

    Given 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

    August 13, 2021 at 9:34 am #631426
    cadhakan
    Member
    • Topics: 71
    • Replies: 123
    • ☆☆

    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

    August 13, 2021 at 4:32 pm #631469
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51560
    • ☆☆☆☆☆

    Well 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.

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