0
$\begingroup$

This is a self study question. I'm calculating a forward rate.

Specifically, I have that in a country X, the Spot Rate is 5X/1US. I also have that the 1 year interest rate is 13% in country X and inflation is 12%. The US interest rate is 4% with 3% inflation.

I'm computing the forward rate as:

$F= S(1+i_d)/(1+i_f) = 5 *(1+.04)/(1+.13) = 4.602.$

However I'm also told that X's market risk premium is 300 basis points above US treasuries. I'm unsure how to factor that in....

$\endgroup$
1
$\begingroup$

You do not need to factor in the risk premium or the inflation rates to get the Forward Rate. The calculation you are making is from the idea of Covered Interest Rate Parity. To calculate the forward rate all you need are the two interest rates.

I'm not sure if the question is trying to confuse by giving extra data. Inflation rates and risk premia can be important for related calculations.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.