A CFA problem.

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Suppose the Argentina Peso is at a 1-year forward premium of 0.0400 to the Brazil real and that Argentina’s 1-year interest rate is at 7.00 percent. If an Argentine investor has no arbitrage opportunities, then the Brazilian interest rate is closest t

A) 3.00%.

B) 6.60%.

C) 7.40%.

D) 11.00%.

Need help, thank you!

himba

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.

himba

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.