Exchange Rates

CFA Level II
#1

I understand the: A:B 1.5 1.5 B/A 1.5 B per A The domestic interest rate is 9% and the foreign interest rate is 7%. If the forward exchange rate is 5 domestic units per foreign unit, what spot exchange rate is consistent with interest rate parity? I know the formula: S x {(1+counter)/(1+base)] = F However, when they talk about the domestic and foreign interest rates, which one is the base currency and which one is the counter currency. I would have thought that the domestic would be the base currency, but the answer says otherwise…

#2

Nevermind, I answered my own question. It says, “…forward exchange rate is 5 domestic units PER foreign unit…” Therefore, foreign = base!

#3

its all very confusing…i have a related question… can it happen that in actualy exam they give an exchange rate which is counter intuitive… for example JPY: 112 Some guys like me would just assume that a is equal to 112 JPY. Can CFAI do that?

#4

I wouldn’t worry about that. The questions will not have ambiguous notation.

#5

I can’t say for sure that they won’t have crazy questions like that, but I would still be prepared for any format.

#6

sameeragarwal Wrote: ------------------------------------------------------- > for example JPY: 112 \> Some guys like me would just assume that a is > equal to 112 JPY. In the example you gave, 1 dollar was indeed 112 JPY, no?

#7

swaptiongamma Wrote: ------------------------------------------------------- > sameeragarwal Wrote: > -------------------------------------------------- > ----- > > for example JPY: 112 \> \> Some guys like me would just assume that a is > > equal to 112 JPY. > > In the example you gave, 1 dollar was indeed 112 > JPY, no? according to the notation 112 dollars per yen

#8

There is a way to prevent confusion during the exam: 1. Make all exchange rates to direct quote: DC/FC 2. Then remember the interest rate parity Sport rate/ Forward Rate = Domestic interest rate / Foreign interest rate See, all the "D"s are numerators, and all the F’s are denominators (including Forward rate) in DIRECT Quote (and director quote is D/F also)! I think this should help! Forget about “counter, base” etc…