- CFA Exams
- CFA Level I Exam
- Study Session 14. Derivatives
- Reading 37. Pricing and Valuation of Forward Commitments
- Subject 6. Currency Forward and Futures Contracts
CFA Practice Question
The current exchange rate between Thai bahts and US$ is 35 baht/$1. The one-year interest rate available on U.S. treasury securities is 4.5%, and the equivalent rate on Thai debt instruments is 13.5%. According to interest rate parity, what should the one-year forward Baht/$ exchange rate be?
A. 38.014
B. 36.575
C. 32.225
Explanation: F/35 = (1 + 0.135)/(1 + 0.045);
F = 38.014 (remember, the higher interest rate currency is expected to depreciate).
User Contributed Comments 4
| User | Comment |
|---|---|
| isida | currency is quoted DC/FC |
| sharon | Thai is domestic |
| volkovv | From US investor perspective it is FC/DC, works both ways, just got to be careful with the formula. |
| bbadger | Just remember higher interest rate currency has to depreciate to make IR parity work and you can figure out which way to multiply/divide regardless of which way the currency is quoted. |