# interest rate parity -- is this right?

hey guys, I’m confused on a Schweser question: The domestic interest rate is 9% and the foreign interest rate is 7%. If the forward exchange rate is FC:DC 5.00, what spot exchange rate is consistent with interest rate parity?

they say the answer is 4.91. I thought it would be 5.09 because the domestic currency has higher interest rate therefore would depreciate…can anyone tell me where i’m going wrong here? thanks very much.

The exchange rate quote in the question is FC:DC which means DC/FC! The DC/FC spot rate has to be lower than the forward rate in otder for the DC to depreciate.

You either missed that FC:DC means DC/FC

or you missed that the question provides the forward rate and is asking for the spot rate.

The exchange rate quote in the question is FC:DC which means DC/FC! The DC/FC spot rate has to be lower than the forward rate in otder for the DC to depreciate.

You either missed that FC:DC means DC/FC

or you missed that the question provides the forward rate and is asking for the spot rate.

I missed that it was asking for spot rate – thanks heaps!