CFA Practice Question

There are 227 practice questions for this study session.

CFA Practice Question

You have the following information:

- The one-year Swiss interest rate is 5% (compounded quarterly);
- The one-year Venezuelan interest rate is 25% (compounded quarterly);
- The spot rate is 425.00 Bolivar per Swiss Franc.

What is the forward, half-year exchange rate that creates interest rate parity?

A. 389.52
B. 468.01
C. 385.94
Correct Answer: B

(1 + .25/4)(4x1/2) = 1/425 x (1 + .05/4)(4x1/2) x F
F = 468.01

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.
Tom0409 remember from currency chapter f/d with d (domestic) being Swiss as this is the base currency, i.e. x quantity of Boliver to 1 Swiss Franc. Therefore (1+5%/4)^2 / (1+25%/4)^2 multiplied by spot rate.
Logaritmus Without calculating B is logical choice. On the other hand by taking discount factors into consideration:
Now we have 1 CHF / 1 VEF = 425.00
After six month 1 CHF will be valued at (1.0125)^(-2) =.97546
and VEF respectively (1.0625)^(-2) =.8858.
So future exchange rate should be equal to:
425 *(DF CHF(6M))/(DF VEF(6M)) = 425 *(.97546/.8858) ~ 468.01
You need to log in first to add your comment.