3. Money and foreign Exchange Markets in Frankfurt and New York are veryefficient. Using the following Market information, answer the followingquestions:Spot Exchange rate: 1.1200 $/ €One year interest rate in New York: 3.25%One year interest rate in Frankfurt: 2.15 %Expected inflation rate in Frankfurt: 1.15 %a) What do the financial Markets suggest for inflation in the US next year?b) Estimate Today's one year forward Exchange rate between the dollar and theeuro.c) Calculate real interest rate in both countriesd) Calculate Expected Spot Exchange rate in one year

Interest rates are very important in determining exchange rate and both changes according to that…

a) What do the financial Markets suggest for inflation in the US next year b) Estimate Today's one year forward Exchange rate between the dollar a euro. c) Calculate real interest rate in both countries d) Calculate Expected Spot Exchange rate in one year

a) What do the financial Markets suggest for inflation in the US next year b) Estimate Today's one year forward Exchange rate between the dollar a euro. c) Calculate real interest rate in both countries d) Calculate Expected Spot Exchange rate in one year

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter4: Exchange Rate Determination

Section: Chapter Questions

Problem 23QA

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Question

3. Money and foreign Exchange Markets in Frankfurt and New York are very
efficient. Using the following Market information, answer the following
questions:
Spot Exchange rate: 1.1200 $/ €
One year interest rate in New York: 3.25%
One year interest rate in Frankfurt: 2.15 %
Expected inflation rate in Frankfurt: 1.15 %
a) What do the financial Markets suggest for inflation in the US next year?
b) Estimate Today's one year forward Exchange rate between the dollar and the
euro.
c) Calculate real interest rate in both countries
d) Calculate Expected Spot Exchange rate in one year

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