- 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
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.
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. |