CFAI Exam 4 - Lower Rf leads to currency APPRECIATION???

[Bluey 1.8T]

ok another rant/query, in relation to Q21.

Their answer was something like: the country with the relative lower risk-free rate of return trades at a forward premium and their currency APPRECIATES...

huh?? if a country has a relatively lower interest rate than another, cash is gonna flow towards the country with the higher rate (depreciating the currency of the country with the lower rate)...

can anyone explain that????

 

[z3159712]

Currency appreciates accordnig ot CFa texts
- higher equity investment opportunities
- high debt investmnet opportunities
- percieved better environmental/economic conditions.

Obviously with higher rate of interest, people woudl invest/lend at higher rate of interest, earning more. TO do that they would need money in that currency. Thus, sell their own currency whcih is (lower rate of interest) and increase demand for high rate of interest. --econ 101 supply/demand which drives prices.

 

[Bluey 1.8T]

yeh exactly, so you agree with me? so obviously, a lowr risk-free should lead to a depreciation of that currency (not an appreciation, like cfai said)

btw, i see you've got a unsw student number.... you from unsw?

 

[ca-cbv-cfa]

hey Bluey, I am interested in the UNSW Australian business school, namely either the master of finance or Mcom with the extended dual specialization. I know the school is very well ranked in the asia pacific region but can you give me further insight into the job prospects for the msc finance and Mcom programs in funds management or ibanking. Do the students or recruiters generally look upon the Mcom as inferior to the master of finance ? Or are all the programs within the department looked upon as equals? I ask because I feel the Mcom has a much greater breadth of electives and it looks gool but am worried that as it has marginally lower entrance requirements it is generally less well received. I look forward to hearing from you, Australia is just like Canada but warmer and I could golf more if you are interested in why I am considering school down there lol.

Thanks in advance.

 

[ttouchst]

Interest rate parity assumes that the REAL rate is the same everywhere. So, if the nominal interest rate is higher relative to another country, the expected rate of inflation must also be higher. This will cause the currency with the higher associated nominal interest rate to depreciate.

Nominal Rate = Real Rate + Exp. Inflation

 

[Bluey 1.8T]

Hey ca-cbv-cfa,

i'm thinking, if you want to get into i-banking or funds mgmt, then go for the masters of finance... as you said, its harder to get in... plus, why would you want a greater breadth of electives, seeing as though finance is the field you'd want to work in?

also, try to go to the website and take a look at the actual subjects offered... you will find that finance has alot more relevant subjects to what you'd like to do...

from the top of my head, im pretty sure a masters of finance gives you greater access to the 'better' finance subjects... but its been a while since i've been to uni, so, check out the website and try to get a hold of the subject listing...