Question #12 - Reading 5 Currency Exchange Rates - Understanding Equilibrium Value

Reading: Reading 5 Currency Exchange Rates - Understanding Equilibrium Value

PDF File: Reading 5 Currency Exchange Rates - Understanding Equilibrium Value.pdf

Page: 5

Status: Unattempted

Correct Answer: A

Shared Context

- For this question only, assume that the United States has a current account surplus versus the U.K. The amount by which the £/$ has to change to restore current account balance is least likely to depend on: A) the initial level of current account surplus. B) the projected current account deficit. C) the response of import and export demand to changes in export prices.

Question

For an investor pursuing a carry-trade, the funding currency would most likely be the:

Answer Choices:

A. Pound

B. Euro

C. U.S. Dollar

Explanation

Under a carry trade, the funding currency is the lower yielding currency (in this case, the pound with 1-year nominal interest rate of 6% is the best candidate).

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