A. As the sentence stated, the Forward Argentina Peso is at appreciated to Brazil Real, so the Argentina Peso increase. The equation should be r(brzil)-r(agentina)=Forward premium. I thouht you might be confused by the direct/indirect quote. First, you need to identify which currency appreciated--agentinan. Second, you can take that the argentia as a foreign currency and Brazil Real as a Home currency, Then you list the equation r(HC)-r(FC)=Forward Premium*priod(if any). Under this condition, yes, becuse currently these two country currency relationship was already equilibrium (no arbitrage). But if the exchange reate-interest rate deviate from this condition, the further high interest rate in one country will trigger this nation's currency appreciate. Hope this can make sense. |