CFA Practice Question

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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?

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

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
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