- 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**

Which of the following statement(s) is (are) true about covered interest rate parity?

II. It links spot exchange rates, expected exchange rates, and interest rates.

III. It states that the forward discount or premium is equal to the interest rate differential.

IV. It states that the interest rate movements are supposed to exactly offset inflation differentials.

I. It is a financial arbitrage condition that does not involve any economic theory.

II. It links spot exchange rates, expected exchange rates, and interest rates.

III. It states that the forward discount or premium is equal to the interest rate differential.

IV. It states that the interest rate movements are supposed to exactly offset inflation differentials.

Correct Answer: I and III

II is true for the uncovered interest rate parity. IV is true for the international Fisher relation.

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**User Contributed Comments**
3

User |
Comment |
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mikeb119 |
Fisher is for inflation and interest rates. PPP is for inflation and exchange rates. |

NIKKIZ |
How different is an expected spot exchange rate different from a forward rate? By replacing one with the other, 2 would be true as well. |

davidt876 |
yea i'm with you Nikki-Z |