Question 1

'MicroLend', a microfinance institution, is analyzing exchange rates. The current spot rate is 1.5000 USD/GBP. The 1-year interest rate in the US is 4%, and the 1-year interest rate in the UK is 6%.

According to Interest Rate Parity (IRP), calculate the 1-year forward exchange rate (USD/GBP).

(Enter your answer to four decimal places, e.g., 1.2345)

Accepted Answer

Apply the Interest Rate Parity formula: Forward = Spot × ((1 + Interest Rate of Quote Currency) / (1 + Interest Rate of Base Currency)). Here, GBP is the base currency.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Putting the UK interest rate in the numerator and US in the denominator, resulting in 1.5288.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FM — Financial Management Practice Exam 3

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