Very hard question – Dec 2012 Lignum

The following is written in the lignum question (extract)

“The first derivative product is an over-the-counter forward rate determined on the basis of
the Zuhait base rate of 8.5% plus 25 basis points and the French base rate of 2.2% less 30
basis points.”

At first, I had no idea of what to do but later on I noticed that my Emile Woolf kit is using the interest rate parity. Why? There is no indication that we have to use the interest rate parity. The question talks about the base rates this is the risk free rates (of the government) so why interest rate parity theory?

Next, what Emile woolf is doing is this:

Spot rate now = ZP 142

Using IRPT (from the formula sheet)

Forward rate = 142 x (1.0875/1.019)^(4/12) = 145.1 ZP/Euro

I don’t understand the thing of to the power of (^) (4/12). I get that we only need 4 months interest but why has it been raised to the ^(4/12) and not multiplied by 4/12.

On a separate matter, June 2011, question 2, Casosophia Co had the following info:

“Mazabia’s current annual inflation rate is 9·7% and is expected to remain at this level for the next six months.However, after that, there is considerable uncertainty about the future and the annual level of inflation could be anywhere between 5% and 15% for the next few years. The country where Casasophia Co is based is expected to have a stable level of inflation at 1·2% per year for the foreseeable future.”

The current spot rate is MShs116–MShs128 per 1 euro

Now, there when I multiplied the inflation rates by 6/12 (as we will invest in six months time) I couldn’t get the answer. Again, Emile woolf is raising the calculation of PPPT to ^6/12. Why is it that in Lignum if you multiply the interest rates by 4/12 you get the answer and in inflation rates if you multiply by 6/12 you don’t get the answer? Confused I am. Please help