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Basic Question 10 of 20
You have the following information: - One year Swiss interest rate is 5% (compounded quarterly) - One year Venezuelan interest rate is 25% (compounded quarterly) - The spot rate is 425.00 Bolivar per Swiss Franc What is forward, half-year exchange rate that creates interest rate parity?
B. 468.01
C. 385.94
A. 389.52
B. 468.01
C. 385.94
User Contributed Comments 10
| User | Comment |
|---|---|
| haarlemmer | Easy approach; You need to pay more Bolivar per Swiss Franc in half-year, the answer has to be B. Weak currency tends to have a higher interest rate. |
| solnce | Sorry, but for me as an fx dealer the sentence that a weaker currency tends to have a higher interest rate sounds ridiculuos. Just look at what has been happening over the last 5 years (so-called carry trades): currencies as AUD, NZD, etc. with their 6-8% interest rates have been simply rallying against JPY and CHF with their 1-2% interest rates. That's life. The yen particularly has been just hammered all the way. Down by 80% against AUD and NZD :)) Don't read the economic theory literally. And I have a PhD in economics. :))) |
| ehc0791 | Thinking forward rate, which is based on interest rate parity, is a good indicator of future spot rate will be very difficult to understand the reality. |
| bmeisner | Carry trades eventually unwind because at the end of the day there will be less yen floating around for every NZD and AUD. Granted it may just take a very long time for that to normalize. I suppose thats also a function of real interest rates which are also probably much higher in Australia than in Japan. |
| bmeisner | Dude has a PhD in economics and he's taking the CFA, that makes a lot of sense, shows how useless a PhD is I guess. |
| mcspaddj | Many companies have a pay scale that is dependant on letters behind one's name. Plus, some people just like the challenge of taking tests. I suppose that to go after a PhD you would need to be a glutten for punishment. I think it makes perfect sense to go after a CFA designation. Not all people do it solely for career advancement or monetary awards. I suspect solnce falls into this category. I say more power to him/her. |
| AusPhD | bmeisner, though I agree with your first comment, I think your comment about the utility of a PhD is somewhat ignorant. I have a finance PhD (arguably even more related to the CFA than an economics PhD) and as a result I know more about a quite specific topic than anyone else in the world (and this is worth a lot to my bank, and is reflected in my remuneration). The CFA however, allows me to brush up on a range of other topics and therefor speak with more authority on a wider range of issues (as people expect from PhDs). Also, as I interact with a lot of people from the street but am born and bred aussie, the US centric focus of the CFA is beneficial (a 'global' focus, what a joke). The CFA program and PhDs are very different beasts. |
| biitii | good exercise to understand different compounding, half year rates etc. |
| davcer | always identify de domestic rate according with the spot |
| Oksanata | why 1/425? |
I passed! I did not get a chance to tell you before the exam - but your site was excellent. I will definitely take it next year for Level II.
Tamara Schultz
Learning Outcome Statements
explain spot and forward rates and calculate the forward premium/discount for a given currency;
calculate the mark-to-market value of a forward contract;
CFA® 2025 Level II Curriculum, Volume 1, Module 8.