- CFA Exams
- CFA Level I Exam
- 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**

According to the uncovered interest rate parity, if the one year interest rate for Japanese yen (Y) is 3%, and 5% for U.S. dollars, and the spot exchange rate is Y105.82 per dollar, what is the expected future exchange rate?

Correct Answer: 105.82 x 0.98 = 103.7037.

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**User Contributed Comments**
7

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

PeterW2006 |
Is there something wrong with this answer? US Interest Rate is higher than Japan Interest Rate The answer shows USD depreciating. USD should appreciate. |

nike |
the questions is right. Check the textbook example 1. The euro's forward rate decreases although its interest rate is higher (14% > 10%). The USD in this case must depreciate to keep the equation balance. |

mazen1967 |
it is appreciate |

charomano |
higher interest rate => depreciation |

NIKKIZ |
I think that the trick is to remember to use indirect spot rates for PPP and Uncovered Interest Rate Parity. The answer is E{s1}/105.82 = 1.03/1.05 = 103.804 |

daverco |
Sloppy answer. Without rounding the interest rate differential it is 103.80 |

dada |
@daverco: that's approximate, like the textbook demonstrates. |