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- This topic has 3 replies, 2 voices, and was last updated 1 year ago by John Moffat.

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- August 12, 2021 at 4:56 pm #631372
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) = 1.458.62but i dont get it how they get 145.872 for euros?

can you plz explain me. thank u in advanceAugust 13, 2021 at 8:38 am #631408Given 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 0.011875Using 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 #631426hi 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 #631469Well 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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