F/X question - what am i missing here?

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? A) 4.83. B) 5.09. C) 4.91. Your answer: B was incorrect. The correct answer was C) 4.91. If the domestic interest rate is higher than the foreign, doesn’t it hold that the domestic currency should depreciate? So right now, 1 foreign unit can buy me 5 domestic units. If the domestic depreciates, shouldn’t 1 Foreign unit buy me more than 5 domestic units? I feel like this F/X should be easy, but i’m always getting things backwards and screwing it up…

you are reading the direction wrong… they gave you the forward, asked to calculate the SPOT. S*(1+rd)/(1+rF) =F S*1.09/1.07=5 S = 5 * 1.07/1.09 = 4.91

lol, MOTHER F’R!!! gotta pay more attention…

Isn’t IRP: F(1+rD) = S(1+rF)? so S = F*(1+rD) / (1+rF) or 5*1.09 / 1.07 = 5.09. I’ve looked at my notes and info through the Internet as I don’t have my book with me, but both point to this solution.

F is DC/FC for S to be DC/FC mode so S*[(1+rdc)/(1+rfc)] = F

ah yes… DC:FC = FC/DC that makes it correct. Giving the forward rate as DC/FC makes it tricky! I should have caught that, sonovabitch!