CIMA Exam CIMAPRA19-F03-1 Topic 4 Question 85 Discussion

Actual exam question for CIMA's CIMAPRA19-F03-1 exam

Question #: 85
Topic #: 4

[All CIMAPRA19-F03-1 Questions]

Which of the following best explains why the interest rate parity model is highly effective in practice?

AGovernments actively manage their exchange rates so that parity holds

BDivergence from parity is impossible because exchange rates drive interest rates

CAny divergence from parity can be observed by the market and corrected by arbitrage

DSpeculative forces drive the interest rates and exchange rates together to achieve parity.

Show Suggested Answer

Suggested Answer: A, B, E

by Raylene at May 01, 2024, 10:24 AM

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Jolanda

2 days ago

I believe speculative forces play a role in driving interest rates and exchange rates together to achieve parity. So, I would go with option D.

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Anglea

4 days ago

I agree with Laquita. The market can observe any deviations from parity and take advantage of arbitrage opportunities.

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Laquita

10 days ago

I think the interest rate parity model is effective because any divergence from parity can be corrected by arbitrage.

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Lera

10 days ago

I think option C is the best explanation. Arbitrage traders are constantly looking for any divergence from parity and quickly correct it, making the model highly effective in practice.

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