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Basic Question 22 of 27
According to the uncovered interest rate parity, if the one year interest rate for Japanese yen (Y) is 3%, and 5% for U.S. dollars, and the spot exchange rate is Y105.82 per dollar, what is the expected future exchange rate?
User Contributed Comments 7
| User | Comment |
|---|---|
| PeterW2006 | Is there something wrong with this answer? US Interest Rate is higher than Japan Interest Rate The answer shows USD depreciating. USD should appreciate. |
| nike | the questions is right. Check the textbook example 1. The euro's forward rate decreases although its interest rate is higher (14% > 10%). The USD in this case must depreciate to keep the equation balance. |
| mazen1967 | it is appreciate |
| charomano | higher interest rate => depreciation |
| NIKKIZ | I think that the trick is to remember to use indirect spot rates for PPP and Uncovered Interest Rate Parity. The answer is E{s1}/105.82 = 1.03/1.05 = 103.804 |
| daverco | Sloppy answer. Without rounding the interest rate differential it is 103.80 |
| dada | @daverco: that's approximate, like the textbook demonstrates. |
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Learning Outcome Statements
explain international parity relations (covered and uncovered interest rate parity, forward rate parity, purchasing power parity, and the international Fisher effect);
describe relations among the international parity conditions;
evaluate the use of the current spot rate, the forward rate, purchasing power parity, and uncovered interest parity to forecast future spot exchange rates;
explain approaches to assessing the long-run fair value of an exchange rate;
CFA® 2025 Level II Curriculum, Volume 1, Module 8.