I’m convinced the interest rates in this question are switched around. (However, I’ve been wrong before.)
In the problem, the domestic currency is Euros & foreign is GBP. In the formula for the arbitrage-free forward exchange rate, the UK interest rate should be in the denominator & the Euro interest rate in the numerator; the given answer has it flipped. Thoughts?
Text is correct as given.
The Solution for problem 12 uses .0417 for r (domestic risk-free rate) and .0328 for rf (foreign risk-free rate). However, Exhibit 2 in the questions gives the EUR (domestic) risk-free rate as 3.28% and the GBP (foreign) risk-free rate as 4.17%. Text appears to be incorrect as given.
I’m so glad I found this post. The text is definately wrong. EUR should be domestic c and GBP should be foreign.
I can’t believe they made a mistake like that! We can’t even trust CFAI answers! This really bothers me!!!
I can’t believe you’re so sure of yourself! The text appears correct. No matter what you call the domestic or foreign ccy (CFAI and Schweser each have their own way), look at the Spot exchange rate: the price ccy (here, GBP) must always be in the numerator, and the base ccy (EUR) in the denominator when you compute the forward rate.
I was doing those problems yesterday and also did not find any mistakes. All answers were correct.