Page 35 - F3 Integrated Workbook STUDENT 2019
P. 35

Objectives




               Calculating forecast exchange rates – interest rate parity theory


                 Interest rate parity formula:

                             1 + r
                 F  = S  ×        var
                        0
                   0
                             1 + r base

               If the spot rate is GBP 1 = USD 1.6000 and the interest rates are 5% and 2% in the
               USA and the UK respectively,

                                    1.05
               then: F = 1.6000 ×         = 1.6471
                       0
                                    1.02
               i.e. the rate in 1 year is forecast to be GBP 1 = USD 1.6471

























































                                                                                                       27
   30   31   32   33   34   35   36   37   38   39   40