If the foreign interest rate is 5%, the current exchange rate is 4 and the domestic interest rate is 10%, what is the expected future exchange rate according to the interest parity condition?
A) 4.2
B) 4.4
C) 4.6
D) none of the above

Question

Quizplus · Accepted Answer

The interest parity condition suggests that the expected future exchange rate adjusts to offset any interest rate differential, so that investors are indifferent between holding domestic and foreign bonds. The formula to calculate the expected future exchange rate is: E(S) = S * (1 + i_d) / (1 + i_f), where E(S) is the expected future exchange rate, S is the current exchange rate, i_d is the domestic interest rate, and i_f is the foreign interest rate. Plugging in the given values: E(S) = 4 * (1 + 0.10) / (1 + 0.05) = 4 * 1.10 / 1.05 = 4.19. Since none of the provided options exactly match this calculation, the correct answer is D) none of the above.

If the Foreign Interest Rate Is 5%, the Current Exchange