Hello everyone, There are two things which I keep mixing up and where I would like your input. These two things are 1) Real Exchange rate and 2) Forward Exchange Rates. The primary reason is probably because I keep mixing up the spot rate quotation…
So my questions are:
- Have I understood Real exchange rate calculation correctly?
- Have I understood Forward exchange rate correctly?
- …Or am I just a lost soul swimming in a fish bowl?
Real exchange rate
My interpretation of the formula for this rate: Real exchange rate = AUD/HKD * (Change price level Hong Kong / Change price level Australia)
Example:
Assumption 1: HKD and AUD is as follows: 0,20 AUD / 1 HKD, thus meaning that 1 HKD gets you 0,20 AUD and the price levels in each country reflect this exchange rate.
Assumption 2: HKD appreciate by 10% AND price levels increase by 5 % in Hong Kong (Australia remains the same)
Would this lead to the following real exchange rate = 1,10 x (1,05 / 1,00) = 1,155?
Forward exchange rate
My interpretation of the formula for this rate: Forward exchange rate = AUD / HKD x (1 + i Australia / 1 + i Hong Kong)
Example:
Assumption 1: HKD and AUD is as follows: 0,20 AUD / 1 HKD, thus meaning that 1 HKD gets you 0,20 AUD and the price levels in each country reflect this exchange rate.
Assumption 2: Interest rate in Australia is 0,55% and interest rate is 0,95% in Hong Kong.
Would this lead to the following one year forward rate = Forward rate = 0,20 AUD / 1 HKD x (1,0055 / 1,0095) = 0,199207 AUD / 1 HKD?
Would deeply appreciate if you could help me out with this! Cheers!