CFA Level 2 Curriculum Question 7, pg 539 Uncovered Interest Rate Parity

CFA Level II
#1

On pg 539 of the curriculum on uncovered interest rate parity, can someone point out what Im doing wrong?

1 yr LIBOR for JPY = 0.1%, 1 yr LIBOR for GBP = 3%, current spot JPY/GBP = 129.67

Question 7: If uncovered interest rate parity holds, today’s expected value for JPY/GBP currency pair one yr from now would be closest to:

A)126.02

B)129.67

C)130.05

I thought uncovered interest rate parity implies E(%DeltaS) of a/b = R(a) - R(b) as per Schweser. Is this formula bunk?

If so, shouldn’t the solution be, Expected change in spot rate = 0.1% - 3% = -2.9%

if the current spot rate goes down 2.9%, doesn’t that mean the expected future spot is 129.67* 0.971 = 125.91?

Instead the curriculum states Se = F = 129.67*(1.001/1.03) = 126.02

Which is correct? This seems to conflict with the Schweser on the top of page 258.

#2

It’s an approximation.

The formula that the curriculum has is correct. Not an approximation.

#3

Thanks. That is what I thought. I find it odd that the Shweser would even use the approximation given the actual formula is pretty simple. That is, the forward rates are predictors if the future spot under uncovered rate parity.

#4

You’re welcome.