- 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**

Based on uncovered interest rate parity, if the one year interest rate for Japanese yen (Y) is 3% and 5% for U.S. dollars, and the exchange rate is Y105.82 per dollar, what is the expected future exchange rate?

A. 103.7036.

B. 107.9364.

C. 105.8203.

**Explanation:**105.82 x .98 = 103.7036.

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**User Contributed Comments**
6

User |
Comment |
---|---|

SMcalister |
My answer is 103.8044 (1.03/1.05)*105.82 I was very confused why I couldn't get to any of the answers. |

janis36 |
The way you calculate it is covered interest rate parity. Question asks for uncovered interest rate parity. |

birdperson |
rounding@smcalister and @janis -- explain the difference... |

narayabh |
How did you get the 0.98? |

akirchner1 |
I believe 103.8044 is correct. AN just rounded to .98 when calculating (1+3%)/(1+5%). |

darbyland |
uncovered interest rate parity says the change in the future spot rate (f/d) = interest rate (f) - interest rate (d). Here, the domestic country is the US and the foreign country is Japan, making the change in the future spot rate = -2%. That is where multiplication by 0.98 is coming from. |