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PRMIA Exam 8006 Topic 4 Question 101 Discussion

Actual exam question for PRMIA's 8006 exam
Question #: 101
Topic #: 4
[All 8006 Questions]

A currency with a lower interest rate will trade:

Show Suggested Answer Hide Answer
Suggested Answer: B

Given covered interest parity, the currency with a lower interest rate will trade at a forward premium. Choice 'b' is the correct answer.

For an intuitive reasoning, consider a currency forward contract that matures in 3 months. The seller has agreed to sell, say JPY 1,000,000 in exchange for USD 10,000 in the future. In order to cover himself, he borrows the USD right now and converts it to JPY at spot which he puts in a JPY deposit. Assuming JPY interest rates are less than USD interest rates, he pays more on his USD borrowing than he receives on his JPY deposit. Therefore he has to price the forward contract at a premium to spot to cover the interest rate differential.


by Jose at Sep 18, 2024, 06:56 PM

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Audra
10 months ago
D is the way to go. It's like trying to determine the weather solely based on the temperature - there are other factors involved too.
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Jacquelyne
10 months ago
I'm feeling a bit currency-ous about this question. Maybe I'll just go with the flow and pick option A.
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Mitzie
9 months ago
Kate: Looks like it, let's go with A) at a forward discount.
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Marta
9 months ago
So, we're all going with option A then?
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Kate
9 months ago
I agree, a lower interest rate usually leads to a currency trading at a forward discount.
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Rashida
9 months ago
I think it's A) at a forward discount.
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Nguyet
10 months ago
I'm not sure, but I think the answer might be D) cannot be determined solely on the basis of interest rates because there could be other factors affecting currency trading.
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Milly
10 months ago
I disagree, I believe the answer is B) at a forward premium because lower interest rates can attract foreign investors looking for higher returns.
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Stefania
10 months ago
B is definitely wrong. A lower interest rate currency should not trade at a forward premium. That doesn't make sense.
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Dorthy
10 months ago
I'm not sure about this one. I think D might be the best choice since interest rates alone can't determine the forward price.
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Titus
9 months ago
C: I believe it will trade at the same prices for forwards as for the spots.
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Haydee
9 months ago
B: I think it might actually trade at a forward premium.
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Jeannetta
9 months ago
A: It will trade at a forward discount.
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Rebbeca
10 months ago
I think the answer is A) at a forward discount because lower interest rates usually lead to a weaker currency.
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Novella
10 months ago
Option A seems like the correct answer. A currency with a lower interest rate should trade at a forward discount.
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Dusti
9 months ago
Definitely. It's important to consider these factors when trading currencies.
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Hillary
10 months ago
I agree. It's all about the relationship between interest rates and currency value.
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Cecilia
10 months ago
Yes, that makes sense. It would be advantageous to buy the currency at a lower rate.
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Joseph
10 months ago
I think A is correct. A currency with a lower interest rate will trade at a forward discount.
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