- CFA Exams
- CFA Exam: Level I 2021
- Study Session 5. Economics (2)
- Reading 18. Currency Exchange Rates
- Subject 4. Forward Calculations

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**CFA Practice Question**

Suppose the spot exchange rate is $2/£. The forward exchange rate is $1.9/£. Which of the following is true?

B. The £ is selling at a premium.

C. The £ is selling at a discount.

A. The U.S. interest rates are lower.

B. The £ is selling at a premium.

C. The £ is selling at a discount.

Correct Answer: C

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**User Contributed Comments**
14

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

Tukker |
spot: 1 USD costs 2 GBP fwd : 1 USD costs only 1.9 GBP |

epalumbo |
Other way around: spot 1GBP costs $2 fwd 1GPP costs $1.90 |

shiva5555 |
Isn't this a premium then since it costs more? |

Beret |
A forward premium (discount) is the proportion by which a country's forward exchange rate exceeds (falls below) the spot rate. |

Creep |
Good Question... |

business |
Why not US interest are lower. using Covered interest parity ie change in interest rates = forward premium/ discount. In this case £ depreciated and hence UK interest are higher thatn US i.e US interest lower |

kondagadu |
why not A? Dollar is trading at a discount , doesn't that mean the interest rates are lower? |

kondagadu |
sorry dollar is trading at a "premium" , the answer should be A and C ??? |

Shaan23 |
I had A and C as well |

merbpr |
Yes, interest rates in the USD should be lower but question is related to currencies, not interests. |

Kevdharr |
Merbpr, the question isn't strictly asking if its selling at a premium or a discount . It is asking "which is true". Both A and C are true so they should both be the right answer. |

gregsob2 |
A might be true, and might be false. Interest rates are determined by many factors, including currency exchange rates. |

sargis |
The question doesn't say if the covered interest parity holds, so A is not true |

davidt876 |
espect sargis |