Suppose the Argentina peso is at a 1-year forward premium of 4% relative to the Brazilian real and that Argentina’s 1-year interest rate is 7%. If interest rate parity holds, then the Brazilian interest rate is closest to: A) 11.00%. B) 6.60%. C) 3.00%. Answer: A According to interest rate parity the currency with the lower interest rate is expected to appreciate so the Argentina rate of 7% is approximately 4% less than the Brazilian rate of 7 + 4 = 11%. I’m a litttle confused as to what this question was telling me. When they say the Argentina peso is at a 1-year forward premium relative to the Brazilian Real. Wouldnt that mean that Brazil has the lower rate then?
Your correct, Brazil would be lower in the past, given Argentina’s forward premium and higher IR we can say, if the IRP holds, Brazil’s future rate should appreciate relative to the peso
i just finished the ICAPM reading so feel free to go on and on about currency premiums!