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Basic Question 1 of 4
You have the following information:
- The one-year Venezuelan interest rate is 25% (compounded quarterly);
- The spot rate is 425.00 Bolivar per Swiss Franc.
B. 468.01
C. 385.94
- The one-year Swiss interest rate is 5% (compounded quarterly);
- The one-year Venezuelan interest rate is 25% (compounded quarterly);
- The spot rate is 425.00 Bolivar per Swiss Franc.
What is the forward, half-year exchange rate that creates interest rate parity?
A. 389.52
B. 468.01
C. 385.94
User Contributed Comments 10
| User | Comment |
|---|---|
| haarlemmer | Easy approach; You need to pay more Bolivar per Swiss Franc in half-year, the answer has to be B. Weak currency tends to have a higher interest rate. |
| solnce | Sorry, but for me as an fx dealer the sentence that a weaker currency tends to have a higher interest rate sounds ridiculuos. Just look at what has been happening over the last 5 years (so-called carry trades): currencies as AUD, NZD, etc. with their 6-8% interest rates have been simply rallying against JPY and CHF with their 1-2% interest rates. That's life. The yen particularly has been just hammered all the way. Down by 80% against AUD and NZD :)) Don't read the economic theory literally. And I have a PhD in economics. :))) |
| ehc0791 | Thinking forward rate, which is based on interest rate parity, is a good indicator of future spot rate will be very difficult to understand the reality. |
| bmeisner | Carry trades eventually unwind because at the end of the day there will be less yen floating around for every NZD and AUD. Granted it may just take a very long time for that to normalize. I suppose thats also a function of real interest rates which are also probably much higher in Australia than in Japan. |
| bmeisner | Dude has a PhD in economics and he's taking the CFA, that makes a lot of sense, shows how useless a PhD is I guess. |
| mcspaddj | Many companies have a pay scale that is dependant on letters behind one's name. Plus, some people just like the challenge of taking tests. I suppose that to go after a PhD you would need to be a glutten for punishment. I think it makes perfect sense to go after a CFA designation. Not all people do it solely for career advancement or monetary awards. I suspect solnce falls into this category. I say more power to him/her. |
| AusPhD | bmeisner, though I agree with your first comment, I think your comment about the utility of a PhD is somewhat ignorant. I have a finance PhD (arguably even more related to the CFA than an economics PhD) and as a result I know more about a quite specific topic than anyone else in the world (and this is worth a lot to my bank, and is reflected in my remuneration). The CFA however, allows me to brush up on a range of other topics and therefor speak with more authority on a wider range of issues (as people expect from PhDs). Also, as I interact with a lot of people from the street but am born and bred aussie, the US centric focus of the CFA is beneficial (a 'global' focus, what a joke). The CFA program and PhDs are very different beasts. |
| biitii | good exercise to understand different compounding, half year rates etc. |
| Tom0409 | remember from currency chapter f/d with d (domestic) being Swiss as this is the base currency, i.e. x quantity of Boliver to 1 Swiss Franc. Therefore (1+5%/4)^2 / (1+25%/4)^2 multiplied by spot rate. |
| Logaritmus | Without calculating B is logical choice. On the other hand by taking discount factors into consideration: Now we have 1 CHF / 1 VEF = 425.00 After six month 1 CHF will be valued at (1.0125)^(-2) =.97546 and VEF respectively (1.0625)^(-2) =.8858. So future exchange rate should be equal to: 425 *(DF CHF(6M))/(DF VEF(6M)) = 425 *(.97546/.8858) ~ 468.01 |
I am happy to say that I passed! Your study notes certainly helped prepare me for what was the most difficult exam I had ever taken.
Andrea Schildbach
Learning Outcome Statements
describe how fixed-income forwards and futures are priced, and calculate and interpret their no-arbitrage value;
CFA® 2025 Level II Curriculum, Volume 5, Module 31.