Question

Assume there exists a forward foreign exchange market in Ghana and this market has the based on the information characteristics below. Assuming there is interest rate parity; calculate UK 90-day interest rate per annum based on the information below.
90 day interest rates (Ghana) …….13% p.a
90 day interest rates (UK) ………….? p.a
Spot rate…………………………..GHS 6.1000/£
90 day forward rate………………..GHS 6.1200/£
Assume that the Nigerian Naira exhibits a 6-month interest rate of 12 percent p.a while the U.S. dollar exhibits a 6- month interest rate of 2.5%. From the U.S investor’s point of view the U.S. dollar is the home currency. According to interest rate parity argument what should the forward rate premium of the peso with respect to the U.S. dollar be?

Answer 1

(A) Let us assume that a year consists of 360 days, GHS is the domestic currency and GBP is the foreign currency.

90 days Ghanian Interest Rate = rg = 13% per annum or 3.25% every 90 days

90 days UK Interest Rate = ru = 4R % per annum or R % per 90 days

Spot Rate = S = 6.1 GHS / GBP and 90 day forward rate = F = 6.12 GHS / GBP

F1 / S = (1+rg) / (1+ru)

6,12 / 6.1 = (1.0325) / (1+R)

R = 0.0291 or 11.64% per annum

NOTE: Please raise a separate query for the solution to the second unrelated question.