CFA Practice Question

There are 341 practice questions for this study session.

CFA Practice Question

The current exchange rate between Thai bahts and U.S. dollars is 35 baht/$1. The one-year interest rate available on U.S. treasury securities is 4.5% and the equivalent rate on Thai debt instruments is 13.5%. According to interest rate parity, what should the one-year forward baht/$ exchange rate be?
A. 39.725
B. 38.014
C. 36.575
Explanation: F/35 = (1 + 0.135)/(1 + 0.045)

F = 38.014

Remember that the higher interest rate currency is expected to depreciate.

User Contributed Comments 5

User Comment
isida currency is quoted DC/FC
sharon Thai is domestic
volkovv From US investor perspective it is FC/DC, works both ways, just got to be careful with the formula.
bbadger Just remember higher interest rate currency has to depreciate to make IR parity work and you can figure out which way to multiply/divide regardless of which way the currency is quoted.
houstcarr has nothing to do with traders expecting a currency to appreciate/depreciate, it is just a no-arb condition based on prevailing rate differentials and the spot rate
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