forward exchange rates currency, exchange, domestic, afternoon

noel

what i have studied is that because of interest rate parity a country with relative high interest rates will see their currency devaluate.

Question 10 on CFAI Mock afternoon says 'when domestic interest rates are lower than foregin rates the forward exchange rates will be lower"

Based on PPP shouldn't forward rate be lower?

OmarAdnan

Forward rate Domestic cost in terms on foreigh: 1 euro costs 0.50 dollars. DC/FC = .5/1 = .5

i rates are higher in euro than in dollars so in the future, if irp holds, a euro must be worth less. it will take less dollars to buy a euro. so say it takes .4 dollars to buy a euro. .4/1 = .4

forward rate is Lower when expressed in DC/FC

busterbluth

oh, thanks june