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ACCA Strategic Professional · Advanced Financial Management · Management of international trade and finance

Spot rate is 80 Kenyan shillings (KES) per £1. One-year interest rates are 12% in Kenya and 4% in the UK. Using interest rate parity, what is the one-year forward rate (KES per £1)?

The forward rate is KES 86.15 per pound. Interest rate parity gives spot multiplied by the ratio of interest factors, 1.12 over 1.04. The higher Kenyan interest rate means the shilling trades at a forward discount against sterling.

  1. AKES 74.67
  2. BKES 86.15Correct
  3. CKES 86.40
  4. DKES 85.33

Explanation

F = 80 x 1.12/1.04 = 86.15. KES 86.40 wrongly multiplies by 1.08 (the simple rate difference). KES 74.67 inverts the ratio. The higher-interest currency trades at a forward discount, so KES per £ rises.

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