- CFA Exams
- CFA Level I Exam
- Topic 2. Economics
- Learning Module 8. Currency Exchange Rates: Understanding Equilibrium Value
- Subject 3. A Long-Term Framework for Exchange Rates
CFA Practice Question
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?
Correct Answer: 105.82 x 0.98 = 103.7037.
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. |