CFA Practice Question

There are 253 practice questions for this study session.

CFA Practice Question

______ states that high interest rates on a currency are offset by forward discounts and that low interest rates are offset by forward premiums.

A. Covered interest differential.
B. International Fisher effect.
C. Uncovered interest rate parity.
Correct Answer: C

User Contributed Comments 5

User Comment
alai2008 Uncovered interest rate parity states that there is a relation between the spot price and the interest rate diferential equal to the forward price. the rationales is, higher interest rates will attract money now, and this inflow of money will lower interest rate, so in the future ( we are stating forward prices) there would be an outflow of money lowering fx.
StJohnDale What is the difference between A & C?
Teeto I think A is correct since forward rates are used in the question.
C would be like ...offset by currency depreciation .... offset by currency appreciation
davidt876 yea i think both A & C are correct
b25331 Somethings wrong here.
C should have been forward rate parity, not UIRP.

Forward rate parity builds upon covered interest rate parity and uncovered interest rate parity.

UIRP states, that if the parity holds, then the expected change in spot rates is equal to the interest rate differential.

CIRP links spot rates, forward exchange rate and interest rates.
Thus, if both parities holds, FX transactions made by speculators and risk-neutral investors will push the forward premium/discount into alignment with the consensus expectation of the future spot rate.
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