- CFA Exams
- CFA Level I Exam
- Study Session 4. Economics
- Reading 10. Currency Exchange Rates: Understanding Equilibrium Value
- Subject 3. A Long-Term Framework for Exchange Rates

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**CFA Practice Question**

Suppose that the one year interest rate is 4% in Canada (domestic country). The expected Canadian inflation rate is 2% and the expected German inflation rate is 3%. If the international Fisher relation holds, the exact one year interest rate in Germany should be _____, and the approximate amount (by linear approximation) should be ______.

Correct Answer: 502% and 5%.

To get the approximate amount: r

To get the exact amount: (1 + r

_{Germany})/(1 + 0.04) = (1 + 0.03) / (1 + 0.02) => r_{Germany}= 5.02%.To get the approximate amount: r

_{Germany}- 0.04 = 0.03 - 0.02 => r_{Germany}= 5%.###
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