Reading 19: Foreign Exchange Parity Relations - LOS h, (P

答案和详解如下：

1．George Canyon, CFA, an international trader and analyst with Canyon Trading, wants to use the international Fisher relation to determine his trading strategies for the Chinese yuan. First, he needs to confirm that the interest and inflation rate relationships are consistent with those of the United States. In his analysis, he determines that the Chinese nominal interest rate is 10.2 percent, while the U.S. inflation rate is 3 percent and the nominal interest rate is 6.1 percent. According to the international Fisher relation, the Chinese inflation rate should be:

A)   6.10%.

B)   3.00%.

C)   6.98%.

D)   10.02%.

The correct answer was C)

Using the international Fisher relation:

Exact methodology: (1 + r_FC) / (1 + r_DC) = (1 + E (i_FC)) / (1 + E (i_DC))

Linear approximation: r_FC – r_DC = E (i_FC) – E (i_DC)

By substituting:
(1 + 0.102) / (1 + 0.061) = (1 + i_FC) / (1 + 0.03)
(1 + i_FC) = 1.0698
i_C = 6.98%

2．Simon Peak, CFA, an international trader and economist for Canyon Peak Trading, feels that the interest and inflation rate differentials should be similar for both China and the United States. The inflation rates for China and the U.S. were 7 percent and 3 percent, respectively. Using the linear approximation of the international Fisher relation to calculate the inflation differential, his result is:

A)   4.0%.

B)   3.2%.

C)   3.1%.

D)   3.0%.

The correct answer was A)

Using the linear approximation for the international Fisher relation:
r_C – r_US = E (i_C) – E (i_US) = 0.07 – 0.03 = 0.04 or 4.0%

3．George Canyon, CFA, an international trader and analyst with Canyon Trading, wants to use the international Fisher relation to determine his trading strategies for the Chinese yuan. Based on his analysis, the expected inflation rate is 7 percent and the real interest rate is 3 percent. In order to determine a price for certain corporate debt Canyon is interested in buying, he will use the exact method of the international Fisher relation. Therefore, the nominal interest rate that he should use is:

A)   10.0%.

B)   7.0%.

C)   10.2%.

D)   4.0%.

The correct answer was C)

Using the international Fisher relation:

Exact methodology: (1 + r) = (1 + real r) × (1 + E (i))

Where:
r = nominal interest rate
real r = real interest rate
E (i) = expected inflation

The nominal interest rate is:
(1 + r) = (1 + 0.03) × (1 + 0.07)
(1 + r) = (1.102)
r = 0.102 or 10.2%

4．The Worldwide Equity-Income Fund is a U.S. based mutual fund whose objective is to seek current income through participation in the U.S. and global equity and fixed-income markets. According to its bylaws, Worldwide can invest no more than 25 percent of its funds in the assets of any one country. Currently, it holds a substantial amount of foreign securities, heavily weighted in British stocks and bonds. Mary Larson, CFA, has recently joined Worldwide as a portfolio manager. Larson is a recent graduate of Washington State University with a double major in Economics and Finance, where she studied interest rate parity and purchasing power parity. Larson’s role at Worldwide will encompass many areas, including forecasting and strategy.

Larson has been asked to examine the current portfolio holdings, and project how the current position will perform over the next year under various interest rate scenarios. U.S. interest rates are currently 7 percent and the real rate of interest has been about 2 percent over the past 20 years. Today's spot rate is $1.7921 per British pound.

Due to a weakening in world oil prices, as well as the results from the recent U.S. presidential election, Larson determines it is necessary to calculate her own forecast of the expected inflation rate in the U.S. The international Fisher relation predicts that the interest rate differential between two countries should be equal to the expected inflation differential. Therefore, countries with higher expected inflation rates will have higher nominal interest rates, and vice versa. A change in domestic rates could lead Larson to suggest substantial changes to the current portfolio corporation.

Larson is asked to recall the correct representation of purchasing power parity. S_t is the exchange rate at time t, expressed in units of foreign currency per domestic currency. I_D and I_F are the expected rates of inflation in the domestic and foreign countries, and E( ) denotes an expected value. Which of the following is the CORRECT representation of purchasing power parity?

A)   E(S₁) / S₀ = [1 + E(i_FC)] / [1 + E(i_DC)].

B)   E(S₀) / S₁ = [1 + E(i_FC)] / 1 + E(i_DC)].

C)   E(S₁) / S₀ = [1 + E(i_DC)] / 1 + E(i_FC)].

D)   S₀ / E(S₁) = [1 + E(i_FC)] / [1 + E(i_DC)].

The correct answer was A)

The correct representation of purchasing power parity is:  E(S₁) / S₀ = [1 + E(i_FC)] / [1 + E(i_DC)].

5．Larson predicts that the spot exchange rate for British pounds will be $1.8653 per pound in one year. Using the information above and assuming the expected inflation rate in the U.S. is 6 percent, Larson has arrived at her conclusion based upon the assumption that the inflation rate in Great Britain will be:

A)   10.3%.

B)   8.4%.

C)   3.6%.

D)   1.8%.

The correct answer was D)

Using the information above and assuming the expected inflation rate in the U.S. is 6%, the expected inflation rate in Great Britain is 0.018, or 1.8%, computed as:

The relative form of the purchasing power parity condition implies that the expected future spot rate can be estimated as follows:

S_t=0 x (1 + I_US)/(1 + I_UK) = E[S_t+1]

So, we can rearrange this equation to isolate the unknown, the expected inflation rate in the United Kingdom:

1 + I_UK = 1.06 (1.7921 / 1.8653) = 1.018

I_UK = .018 = 1.8%