- CFA Exams
- CFA Exam: Level II 2021
- 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**

Uncovered interest rate parity states that:

II. The expected interest differential should offset the inflation differential between the two countries.

III. The expected inflation differential should offset the currency differential between the two countries.

IV. The expected currency differential should offset the interest differential between the two countries.

I. The expected currency differential should offset the inflation differential between the two countries.

II. The expected interest differential should offset the inflation differential between the two countries.

III. The expected inflation differential should offset the currency differential between the two countries.

IV. The expected currency differential should offset the interest differential between the two countries.

Correct Answer: IV only

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**User Contributed Comments**
2

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

danlan2 |
I, III: PPP II: international fisher |

jimmyvo |
PPP = fx prices & inflation International fisher = interest & inflation Uncovered interest rate parity = fx price & interest |