FRM Part I · FRM Exam Part I · Foreign Exchange Markets
Spot EUR/USD is 1.2000 USD per EUR and the one-year forward is 1.2240. The one-year USD rate is 4.00% (annual compounding). Under covered interest rate parity, what is the implied one-year EUR interest rate?
The implied EUR rate is 1.96%. The forward-to-spot ratio is 1.2240/1.2000 = 1.02, and parity says this equals 1.04 divided by one plus the EUR rate. So one plus the EUR rate is 1.04/1.02 = 1.0196, giving 1.96%.
- A2.00%
- B1.96%Correct
- C6.08%
- D3.92%
Explanation
F/S = 1.2240/1.2000 = 1.02 = (1.04)/(1 + r_EUR). So 1 + r_EUR = 1.04/1.02 = 1.019608, r_EUR = 1.96%. The 2.00% option subtracts the 2% premium from 4% linearly, which is only an approximation. The 6.08% option adds the premium and the USD rate.
Did you get it right without looking?
One question tells you little. A timed set on Foreign Exchange Markets shows your real accuracy, how long you take and where you lose marks.
More Foreign Exchange Markets questions
- A country maintains a fixed exchange rate and free capital mobility. Domestic interest rates are lowered by the central bank to stimulate gr…
- Under a currency board arrangement, which of the following is the defining feature?
- The spot rate is USD 1.2000/EUR. The USD interest rate is 4% and the EUR rate is 2%, both continuously compounded. What is the no-arbitrage …
- The USD/CHF spot rate is 0.9000 CHF per USD. The 6-month forward points are quoted as -60 (one point = 0.0001). Which statement is correct?
- Spot GBP/USD is 1.2500 USD per GBP. The one-year forward rate is 1.2350. Under covered interest parity with annual compounding, the one-year…
- In a country's balance of payments accounts, which of the following transactions would be recorded in the current account?