CFA Practice Question

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CFA Practice Question

The currency with the higher interest rate will trade at a ______.

A. forward discount
B. forward premium
Correct Answer: A

User Contributed Comments 4

User Comment
schweitzdm My head just exploded
robbiecow It needs to trade at a forward discount because there cannot be any arbitrage. If you think about it this way then it makes sense because this will prohibit the ability to make risk free profit.

Take currency X which has an interest rate> than currency Y. Interest Rate Parity states that if I convert Y to X and invest at the higher interest rate; this should be the same as if I invested currency Y at the interest rate for Y. In order to accomplish parity, you must have X trade at a forward discount.

Hope that helps.
leon121 nice explanation
maryprz14 the currency with higher %r is unrealistically inflated in the future >>> should be traded at discount.
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