Anyone remember the following Q in sample 3: 6. Based on the data presented in Exhibit 1, Baroque’s expectation for Brazil’s currency is consistent with which of the following parity relationships? Answer is D. Uncovered interest rate parity In the exhibit, interest rate differential between the two countries is 8.80 - 4.80 = 4%, and Baroque’s forecast is Brazil Real depreciate 5% to USD in the coming year. The solution by CFAI also said ir diff is 4%, not 5%. My question is why it’s said “consistent” in the q? Shouldn’t his forecast be 4% to be consistent with the UIRP?
The forecast of 5% which you are talking about relates another question where you must calulate the FCRP.
sorry, I still didn’t get it. Cuz I failed to find anything equal to 4%… The solution read as follows: “According to uncovered interest rate parity, the expected currency depreciation should offset the interest rate differential between the two countries. With rUS = 4.80% and rBrazil = 8.80%, the expected currency depreciation from the differential between the interest rates in the two countries is 8.80 - 4.80 = 4%, not 5%.” It also quotes that 5%. Where does the FCRP come from in this Q? …
My opinion is that the question body should say “inconsistent” instead of “consistent”. The answer is also irrelevant.
thanks, that makes sense
i think it just asks about the theory and CFA offers the calculation to show how to get the result. But it is irrelevant to the answer. You don’t need to know the either 4% or 5% but you have to know the theory beyond the results. So i think CFA gives us the right answer.
they could use C on that answer also though since given Exhibit 1, there is also inflation data so relative PPP could be used to a certain extent. I think the question is not well worded.