Q3. The Asian Spec Fund, managed by Jonathan Khamal, CFA, engages in currency speculation for its clients. Based in Paris, Khamal believes that there is an opportunity to speculate on the Malaysian Ringgit. The current spot exchange rate is 4.417 Malaysian Ringgit per euro. Khamal wants to determine an expected exchange price one year from today. Assuming the one-year nominal interest rate for the European Economic Community is 11.76% and the Malaysian one-year nominal interest rate is 7.6%, what would be the expected exchange rate for the Malaysian Ringgit one year from today?

A)   4.586 MR/EUR.

B)   4.246 MR/EUR.

C)   4.253 MR/EUR.

答案和详解如下：

Q3. The Asian Spec Fund, managed by Jonathan Khamal, CFA, engages in currency speculation for its clients. Based in Paris, Khamal believes that there is an opportunity to speculate on the Malaysian Ringgit. The current spot exchange rate is 4.417 Malaysian Ringgit per euro. Khamal wants to determine an expected exchange price one year from today. Assuming the one-year nominal interest rate for the European Economic Community is 11.76% and the Malaysian one-year nominal interest rate is 7.6%, what would be the expected exchange rate for the Malaysian Ringgit one year from today?

A)   4.586 MR/EUR.

B)   4.246 MR/EUR.

C)   4.253 MR/EUR.

Correct answer is C)

The formula for uncovered interest rate parity is:

E (S₁) / S₀ = (1 + r_FC) / (1 + r_DC) or (E (S₁) – S₀) / S₀ = %ΔS = [(1 + r_FC) / (1 + r_DC)] – 1
where:
E (S₁) = expected spot rate in one period, quoted in FC per unit of DC
S₀ = spot rate today, quoted in FC per unit of DC
r_FC = interest rate on the FC
r_DC = interest rate on the DC
%ΔS = percentage change in the spot rate

By substituting:

%ΔS = [(1 + 0.076) / (1 + 0.1176)] – 1
= [ 1.076 / 1.1176 ] – 1
= - 0.0372
E (S₁) = 4.417 MR/EUR × (1 – 0.0372) = 4.253 MR/EUR

The Malaysian Ringgit is expected to appreciate 3.72% against the euro over the next year. It will require less Malaysian Ringgits to convert into euro by next year. This is the case because of lower inflation expectations for Malaysia that are implied in its nominal interest rate.