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CFA Level 2 - Economics - Currency Exchange Rates: Understanding Equilibrium Value
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Ella, a currency strategist, is analyzing the exchange rate between the South African rand (ZAR) and the Brazilian real (BRL). The current spot rate is 1 ZAR = 0.30 BRL. However, her analysis of interest rate differentials and purchasing power parity suggests that the equilibrium exchange rate should be 1 ZAR = 0.35 BRL. Assuming Ella's assessment is accurate, which of the following is most likely to occur in the foreign exchange market?
a.
The Brazilian real is expected to depreciate against the South African rand, leading to an exchange rate that deviates further from the equilibrium rate of 1 ZAR = 0.35 BRL, as market participants react to the current economic conditions and sentiment.
b.
The exchange rate between the South African rand and the Brazilian real is likely to remain stable at 1 ZAR = 0.30 BRL, as the market has already priced in the relevant economic fundamentals and interest rate differentials.
c.
The South African rand is likely to appreciate against the Brazilian real, moving towards the equilibrium exchange rate of 1 ZAR = 0.35 BRL.
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