Chapter 5: Currency

Discussion in 'SP5' started by Ayushi Arora, Jul 1, 2022.

  1. Ayushi Arora

    Ayushi Arora Very Active Member

    Hi,
    There is an example given under Covered Interest Parity formula to calculate Spot rate. I am not sure if the forward rate and Spot rate in formula should be foreign per unit domestic currency or domestic per unit foreign currency.
    Based on the example, I think it is foreign per unit of domestic currency.
    Let me know if my understanding is right or there are other ways to approach such questions?

    Thanks
     
  2. Joe Hook

    Joe Hook ActEd Tutor Staff Member

    Hi,

    The spot rate and forward rate can be expressed in either terms (one is the reciprocal of the other) but to be consistent with the Core Reading formula the spot rate should be the cost of one unit of the foreign currency in terms of domestic currency.

    Joe
     

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