September 2019 Q4
So the manager expects the spot rate to be 1:1.16 but forward rate is 1:1.1614 Euro to US dollars. So the investor gets a better conversion from euro to US if they buy the forward. They can buy the forward convert 1 euro into 1.1614 dollars, and then convert those dollars back into euros at 1:1.16 and they will make a profit. (Assuming of course that spot rates do turn out to be 1:1.16.)
April 2009 Q3iv
It's convention in ST5/SP5 to treat these interest rates as convertible. So when swaps are half-yearly the interest rate given is i(2) and so to get the half-yearly effective rate we divide by 2 (because the year can be split into 2). When the basis is actual/360 rather than dividing by 2 or multiplying by 0.5 we instead multiply by (no of days/360)
Your question is a fair one because we often think of compound interest in the real world. However, after you run through a number of past paper questions like this you'll probably become quite thankful that the examiners typically present interest rates to you in a way that is quite simple to handle (mathematically).
Hope this helps. If it generates follow up questions don't hesitate to ask.
Joe
Last edited: Apr 21, 2022
