Uncovered Int Rate Parity: how do I know which is the Domestic rate?
I’m practicing for the CAIA L2 exam using Uppermark testbank.
I encountered this question but got wrong the answe because i didn’t knoe which one was the domestic rate and the foreign one.
“The interest rate in China is 7%, the interest rate in the U.K. is 5%, and the current spot Chinese Yuan/British pound exchange rate is 10.2. According to uncovered interest rate parity, which of the following comes closest to the expected future spot exchange rate?” ANswer is 10.39.
I thought that given the fact that you needed 10.2 yuans to buy 1 pound then the UK currency should be de domestic one but I was wrong. How can I be sure which currency is the domestic to make the calculations?
Formula: (1+rd)/(1+rf) = E(S)/S
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