CFA-LEVEL-II practice question 3 of 10
Barton Wilson, a junior analyst, is a new hire at a money center bank. He has been assigned to help Juanita Chevas, CFA, in the currency trading…
Choose your answer, then check it against the explanation.
Barton Wilson, a junior analyst, is a new hire at a money center bank. He has been assigned to help
Juanita Chevas, CFA, in the currency trading department. Together, Wilson and Chevas are working
on the development of new trading software designed to detect profitable opportunities in the
foreign exchange market. Obviously, they are interested in risk-free arbitrage opportunities.
However, they have also been instructed to investigate the possibility of longer-term currency
exposures that are not necessarily risk-free. To test the logic of their new software, Wilson gathers
the following market data:
• Spot JPY/USD exchange rate = 120.
• Spot EUR/USD exchange rate = 0.7224.
• U.S. risk-free interest rate = 7%.
• Eurozone risk-free rate = 9.08%.
• Japanese risk-free rate = 3.88%.
• Yield curves in all three currencies are flat.
In addition to in-house currency transactions, the new software program is also intended to provide
insight into currency exposure and hedging needs for the bank's major customers. These customers
typically include large multinational firms. Essentially, the bank wants to provide consulting services
to its clients concerning which currency exposures offer the greatest possibility of appreciation. In
this process, the bank will rely on deviations from international parity conditions as an indicator of
long-term currency movements.
Wilson obtains the following data from the econometrics department:
• JPY/USD spot rate one year ago =116.
• EUR/USD spot rate one year ago = 0.7200.
• Anticipated and historical U.S. annual inflation = 3%.
• Anticipated and historical Japanese annual inflation = 0%.
• Anticipated and historical Eurozone annual inflation = 5%.
One of the bank's major customers has significant portions of its business in Japan, and the Eurozone
and has long exposure to both currencies. The customer has traditionally hedged all currency risk.
However, the customer's new risk manager has decided to leave some currency exposure unhedged
in an attempt to profit from long-term currency exposure.
Wilson wants to approximate the forward discount/premium for the JPY against the USD 12 months
from now. According to the approximate version of interest rate parity, the JPY would most likely
trade at a:
Question 3 of 10
Keep practicing
Take the free CFA-LEVEL-II practice test
Ten exam-style questions with answers and explanations, plus the exam facts and study guides.
More questions
Other CFA-LEVEL-II practice questions
- Question 1Martha Gillis, CFA, trades currencies for Trent, LLC. Trent is one of the largest investm…
- Question 2MediSoft Inc. develops and distributes high-tech medical software used in hospitals and c…
- Question 5Glenda Garvey is interning at Samson Securities in the summer to earn money for her last …
- Question 6Richard Grass is the healthcare analyst for Furrnon Investments and is reviewing the inve…
- Question 10William Jones, CFA, is analyzing the financial performance of two U.S. competitors in con…
