CFA Practice Question

There are 227 practice questions for this study session.

CFA Practice Question

Given U.S. interest rates at 2.00% and Japanese interest rates at 1.00% for the same period, where would the Interest Rate Parity Theory expect the JPY/USD exchange rate mostly likely to trend toward, given a current spot exchange rate of 134.00?
A. 135.00
B. 132.00
C. 136.00
Explanation: The Interest Rate Parity Theory says that given disequilibrium in interest rates, the market foreign exchange rate will compensate owners of the lower-yielding currency, by increasing the value of that currency vis-a-vis the higher-yielding currency.

Since, U.S. interest rates are higher than Japanese interest rates for the same period, interest rate parity should cause the value of the dollar to decline and the value of the yen to increase.

User Contributed Comments 1

User Comment
Paulvw Read the question: trend towards, with no time period given - hence the qualitative answer.
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