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Hi sir,
In the absence of inflation rate, we will use IRPT to calculate the future exchange rate. My first question is, if there are 2 rates given for each respective country, (i.e. the borrowing rate and the lending rate), which rate should I use to calculate future exchange rate? Borrowing rate or lending rate? Or would Sir suggest the use of interest rate differential between US and UK?
Second question is, if lets say the interest rate differential between US and UK is to be used, then which rate forms the numerator and which rate forms the denominator?
Assumed UK is the base country and the current spot rate is $/£ 1.5600 (indirect quote)
Borrowing rate : 14% (US), 10% (UK), 4% (Interest Rate Differential)
Lending rate : 9% (US), 3.5% (UK), 5.5% (Interest Rate Differential)Sir, please solve my problem and guide me to the right way. Thank you so much.
Best regards,
Esther PangI cannot believe that the examiner will give the two interest rates and expect you to use interest rate parity to forecast an exchange rate.
However if he did, then you would forecast two exchange rates (the buy rate and the sell rate).
To do so you use the US borrowing rate and the UK deposit rate for one, and then the US deposit rate and the UK borrowing rate for the other.
Regards John
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