Question #22
Reading: Reading 5 Currency Exchange Rates - Understanding Equilibrium Value
PDF File: Reading 5 Currency Exchange Rates - Understanding Equilibrium Value.pdf
Page: 9
Status: Unattempted
Question
The domestic interest rate is 9% and the foreign interest rate is 7%. If the forward exchange rate is DC/FC 5.00, what spot exchange rate is consistent with covered interest parity?
Answer Choices:
A. 4.91
B. 5.09
C. 4.83
Explanation
ForwardDC/FC / SpotDC/FC = (1 + rdomestic) / (1 + rforeign).
SpotDC/FC = ForwardDC/FC (1 + rforeign) / (1 + rdomestic) = (5.00)(1.07) / (1.09) = 4.908