Reading 19: Foreign Exchange Parity Relations - LOS i ～ Q

white, black, Foreign

Q1. George Canyon, CFA, an international trader and analyst with Canyon Trading, wants to use the international Fisher relation to determine his trading strategies. In analyzing expected inflation rates, he wants to correlate the expected rates to nominal interest rates. In doing so, he discovers that the international Fisher relation could approximate nominal interest rates by:

A) adding real interest rates to expected inflation rates.

B) multiplying real interest rates by expected inflation rates.

C) subtracting real interest rates from expected inflation rates.

Q2. George Canyon, CFA, an international trader and analyst with Canyon Peak Trading, is considering trading in the Chinese yuan. Canyon is considering the use of the international Fisher relation in his analysis of China. One concern that Canyon should consider is that the international Fisher relation assumes that:

A) nominal interest rates are stable across time and international borders.

B) real interest rates are stable across time and international borders.

C) real exchange rates are stable across time and international borders.

Q3. Simon Peak, CFA, an international trader and economist with Canyon Peak Trading, is analyzing the inflation and interest rates trends for China. Peak is interested in taking a trading position in interest rate sensitive instruments. If Peak is to assume that the differences in inflation rates are substantially similar to the differences in interest rates, which theory does he prescribe to?

A) Relative purchasing power parity.

B) International Fisher relation.

C) Asset markets approach.

Q4. Donna Ackerman, CFA, is an analyst in the currency trading department at State Bank. Ackerman is training a new hire, Fred Bos, a recent college graduate with a BA in economics.

Ackerman asks Bos to attempt to estimate the inflation rate in the U.S. based on the following data:

§ the spot exchange rate between the GBP and the USD is $0.500.

§ the forward exchange rate is $0.520.

§ the British rate of inflation is 4%.

Bos calculates the rate of U.S. inflation as:

A) 0%.

B) 8.2%.

C) 4.2%.