Skip to content

CMA Final · Strategic Financial Management · The International Financial Environment

Spot USD/INR is Rs 82.00. Using the Fisher effect (exact form), the nominal interest rate in India is 9.12% and the expected inflation in India is 6%. What is the expected real interest rate in India?

Under the exact Fisher effect, one plus the nominal rate equals one plus the real rate times one plus inflation. So the real rate is 1.0912 divided by 1.06 minus one, which is about 2.94%, slightly lower than the simple difference of 3.12%.

  1. A2.94%Correct
  2. B3.12%
  3. C3.00%
  4. D15.12%

Explanation

Real rate = (1.0912 / 1.06) - 1 = 1.02943 - 1 = 2.94%. The 3.12% option simply subtracts 6% from 9.12%, ignoring compounding. The 3.00% figure is a rounded guess, and 15.12% adds the two rates.

Did you get it right without looking?

One question tells you little. A timed set on The International Financial Environment shows your real accuracy, how long you take and where you lose marks.

Practise The International Financial EnvironmentFree diagnostic mock

More The International Financial Environment questions