Question #15
Reading: Reading 5 Currency Exchange Rates - Understanding Equilibrium Value
PDF File: Reading 5 Currency Exchange Rates - Understanding Equilibrium Value.pdf
Page: 6
Status: Unattempted
Correct Answer: B
Question
One-year interest rates are 7.5% in the U.S. and 6.0% in New Zealand. The current spot exchange rate is USD/NZD 0.5500. If uncovered interest rate parity holds, the expected spot rate in one year must be closest to:
Answer Choices:
A. USD/NZD 0.54233
B. USD/NZD 0.55825
C. USD/NZD 0.56675
Explanation
USD interest rate is 1.5% higher hence, NZD will appreciate by 1.5% under the uncovered
interest rate parity.
Expected Spot = 0.5500 × (1.015) = USD/NZD 0.55825