CFA Practice Question

There are 253 practice questions for this study session.

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.
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