This is regarding the Currency Exchange Rates #3 Question asks: THe annual risk free interest rate is 10% in the US and 4% in Switzerland (CHF), respectively, and the 1 year forward rate is CHF:USD=.8. Today’s CHF:USD spot rate must be? A. .8462 B. .7564 C. .8888 I don’t really understand why the answer is A. I mean the math and the concept behind it seems to be conflicting. I mean I understand that since the interest rate in US is more therefore it should depreciate in the forward in order for the parity to hold but isn’t the formula F/S=1+Ra/1+Rb? so plugging in the numbers wouldn’t it be 1.04/1.1(S)= .8 ?
CHF:USD = USD/CHF so X * 1.1/1.04 = 0.8 X = 0.7564 had it wrong before… should be a Schweser erratum
According to my book, the answer is correctly B. Why the confusion?
Hey cpk123? you still around for L2!! wow. I know you failed in 2009, what happened in 2010?
pepp – you still doing the same stuff, starting late… ? I passed in 2010 - now in level III.