Crazy Question

I never saw this is any material however it’s on a sample exam that I am going through an analyst gathers teh following information: 1 yr interest rates: German mark 4% US Dollar 5% spot exchange rate: GM/$ 1.70 Based on the information above, the forward exchange rate that will satisfy the interest rate parity is closest to: a) 1.684 b) 1.716 c) 1.768 d) 1.785

What materials are you using? FOREX is not in level I this June.

I know this sample exam is from 99’

you get 1.7 gm for 1 dollar. and dollar is supposed to lose more value than german mark over the next year. hence A.

answer is C

The answer would be B i think…

Fudge, your right map1, its b im doing so many q’s i always seem to be getting the answers mixe dup FOR THE RECORD THE ANSWER IS B! G night everyone

I get b 1.05/ (1/1.7 * (1.04) )

the forward price is 1.7(1.05/1.04) = 1.7164. this is the no-arbitrage price. for example, if the current forward rate was greater than 17164, let’s say 1.72$/GM, then you would short the contract (buy the $ at contract end). you invest in the GM. if the current forward rate is higher, you do the opposite. i believe that this isn’t part of the level 1 material this year *edited due to misinterpretation of spot rate

The answer is A. Inflation is supposed to devalue the currency. Easy way to calculate: GM 1.7 * 1.04 = GM 1.768 1 year from now to retain purchasing power. $1 * 1.05 = $1.05 1 year from now to retain purchasing power. GM 1.768/1.05 = 1.6838 GM/ to retain purchasing power 1 year from now.

the spot rate is actually GM/1.7$, rlange. i made the same mistake at first

Do you mean 1.7 GM/$? If so, it is the same calulation, just flip the currencies around.

This material was moved to Level 2 in 2008.