14 December 2010
Q. Spot rate> pound 1=$2.5 value of pound is appreciated by 10% find out forward rate? solutionA P1-10%=$2.5 P.90=$2.5 P=$2.777 solution b P1=$2.5+10% P1=$2.75
PLZ ADVICE WHICH SOLUTION IS CORRECT A OR B REGARDS
14 December 2010
For calculating the forward rate , the interest rates of both the currencies need to be known and the requisite formula for calculating the forward rate after that is = F(n)= Sp x [(1+I1%)+(1+I2%)]^n,
where F(n) is the forward rate for the given period ( lets say 1 year)., Sp is the spot rate . I1 is the interest rate of the quoted currency (in your case it will be USD) and I2 is the interest rate of the base currency (GBP);, 'n' is the time period.
In your case let us assume that
Sp= 1 GBP= USD 2.5 I1 = (USD LIBOR for 1 year)= 0.45 I2= (GBP LIBOR for 1 year )= 1 n= 1 year.
14 December 2010
For your benefit if GBP has appreciated against the USD by 10% it means that the GBP has become stronger by 10% i.e. 2.5+10%= 2.75. However as replied earlier this will just be the new "spot rate" and not the forward rate.
CAclubindia
