Although, i feel the question is quite simple.
But i’m forgetting the logic behind calculation.
Can anyone help with the explanation, please ?
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Hello,
Follow the following formulae and calculations to get through this question :-
forward (dom/for) / spot (d/f) = (1+ int dom) / (1+int for.)
Now move spot to the right side of the equation and replaced it with (1+ int dom) / (1+int for.)
It gives you: forward (dom/for) / ((1+ int dom) / (1+int for.)) = spot (d/f)
a / (b/c) = a x (c/b)
So ::::::::: forward (dom/for) x ((1+int for.) / (1+ int dom) = spot (d/f)
Now just put in the values (percentage changes):
(1.05) x (1.015/1.02) -1 = spot —— spot = 1.04485 – 1 = +4.5%
There’s one more way to calculate this with the following formulae:-
Real exchange rate = nominal x (1+foreign/1+domestic)
If you still face any difficulty feel free to connect with me here again.
But, we have studied in class that :
% of appreciation > % of depriciation
In this case, % of appreciation of “Home currency” is 5%
Accordingly, % of depriciation of “Foriegn currency” is 4.76%
Then, applying formula
4.76*1.015/1.02 = 4.74%
5% is given in terms of Home currency while we need “in terms of USD i.e. Foriegn”
Am i wrong? I am still in doubt.