Why should I choose AnalystNotes?
Simply put: AnalystNotes offers the best value and the best product available to help you pass your exams.
Basic Question 10 of 14
The currency with the higher interest rate will trade at a ______.
B. forward premium
A. forward discount
B. forward premium
User Contributed Comments 4
| User | Comment |
|---|---|
| schweitzdm | My head just exploded |
| robbiecow | It needs to trade at a forward discount because there cannot be any arbitrage. If you think about it this way then it makes sense because this will prohibit the ability to make risk free profit. Take currency X which has an interest rate> than currency Y. Interest Rate Parity states that if I convert Y to X and invest at the higher interest rate; this should be the same as if I invested currency Y at the interest rate for Y. In order to accomplish parity, you must have X trade at a forward discount. Hope that helps. |
| leon121 | nice explanation |
| maryprz14 | the currency with higher %r is unrealistically inflated in the future >>> should be traded at discount. |
Thanks again for your wonderful site ... it definitely made the difference.
Craig Baugh
Learning Outcome Statements
explain the arbitrage relationship between spot and forward exchange rates and interest rates, calculate a forward rate using points or in percentage terms, and interpret a forward discount or premium
CFA® 2024 Level I Curriculum, Volume 1, Module 8.