Question #19
Reading: Reading 5 Currency Exchange Rates - Understanding Equilibrium Value
PDF File: Reading 5 Currency Exchange Rates - Understanding Equilibrium Value.pdf
Page: 7
Status: Unattempted
Question
Assume that the domestic nominal rate of return is 4% and the foreign nominal rate of return is 5%. If the current exchange rate is DC/FC 0.400, the forward rate consistent with covered interest rate parity is:
Answer Choices:
A. 0.400
B. 0.318
C. 0.396
Explanation
F/S = (1 + rD) / (1 + rF) where the currency is quoted as DC/FC
F = (1.04/1.05)(0.400) = 0.396