The answer to question #18 (given on page 115 of Book 1) doesn’t make much sense to me. Why does Schweser convert the current spot rate from FC/DC to DC/FC in the first equation? If you keep it as FC/DC, as the example on page 103 does, you would get answer A rather than D. Shouldn’t the formulas for the Asset Market Approach work fine if you use FC/DC in the first equation, and use S(0)= E(S) * ((1+DC)/(1+FC)) in the second equation (with S(0) and E(S) in FC/DC)? Can anyone clear this up? Thanks.
it might help if you post the problem. if direct quotes are used E(S) = S0*(1+rfr(D))/(1-rfr(F))
The question: The current spot rate is 1=Euro 0.74, and the nominal interest rate in Europe is 4%. Assume that expected inflation in each country is equal to zero. What would happen to the spot rate if the US unexpectedly increases its Money Supply by 4% and the nominal US interest rate immediately drops to 2%. Assuming that currently both price indices are equal to one prior to the Money Supply increase and that it will take four years for the increase in Money Supply to translate into higher price levels in the US, the spot rate immediately after the Money Supply announcement is closest to: A. Euro 0.8238 per B. Euro 0.3919 per C. Euro 0.7622 per D. Euro 0.6648 per $ Answer: E(S(4)) = (1/0.74)*(1.03/1.00) = $1.3919 per Euro S(0)= 1.3919 * [((1.04)^4)/((1.02)^4)] = 1.5043 per Euro, or Euro0.6648 per . So my question is: Shouldn’t BOTH S(0)= E(S) * ((1+DC)/(1+FC)) expressed as FC/DC and S(0)= E(S) * ((1+FC)/(1+DC)) expressed as DC/FC yield the same answer? Maratikus, these formulas are different than what you posted. What am I getting tripped up on?