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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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It doesn’t matter what you call domestic and what you call foreign.

CNY increases at the CNY risk-free rate; GBP increases at the GBP risk-free rate.

If it takes CNY 10.2 to buy GBP 1.0 today, and CNY grows at 7% per year while GBP grows at 5% per year, then in one year, CNY 10.914 (= CNY 10.2 × 1.07) will buy GBP 1.05 (= GBP 1.0 × 1.05), or CNY 10.3943 (= CNY 10.914 ÷ 1.05) will buy GBP 1.0.

Simplify the complicated side; don't complify the simplicated side.

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