CFA Practice Question

There are 253 practice questions for this study session.

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.

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.
You need to log in first to add your comment.