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Basic Question 22 of 27
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?
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. |
I used your notes and passed ... highly recommended!
Lauren
Learning Outcome Statements
explain international parity relations (covered and uncovered interest rate parity, forward rate parity, purchasing power parity, and the international Fisher effect);
describe relations among the international parity conditions;
evaluate the use of the current spot rate, the forward rate, purchasing power parity, and uncovered interest parity to forecast future spot exchange rates;
explain approaches to assessing the long-run fair value of an exchange rate;
CFA® 2025 Level II Curriculum, Volume 1, Module 8.