CFA Practice Question

There are 341 practice questions for this study session.

CFA Practice Question

Toulon has an expected inflation rate of 5.35% and its neighbor Brozania has an expected inflation rate of 2.5%. The currency of Toulon will sell at a ______.
A. forward premium of 2.85%
B. forward premium of 5.35%
C. forward discount of 2.85%
Explanation: As a result of relative purchasing power parity, the currency of a country with higher inflation sells at a discount in the forward market. The discount equals the difference between the inflation rates of the two countries. In this case, the currency of Toulon will sell at a discount of 2.85% (= 5.35 - 2.5).

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