Question 3 Real rates. Determine the nominal rates for the three countries listed if they have the following inflation rates and the real rate the world over is 0.73%:Canada: Inflation is 5.81%.Switzerland: Inflation is 2.24%.United States: Inflation is 4.29%.According to the International Fisher effect, what is the approximate nominal rate in Canada?% (Round to two decimal places.)According to the International Fisher effect, what is the approximate nominal rate in Switzerland?% (Round to two decimal places.)According to the International Fisher effect, what is the approximate nominal rate in the United States?% (Round to two decimal places.)

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Question 3

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter8: Relationships Among Inflation, Interest Rates, And Exchange Rates

Section: Chapter Questions

Problem 10QA

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Concept explainers

Market Efficiency

Market efficiency refers to the market's ability to provide investors with all available information about investment options for buying and selling securities. Market efficiency reflects the true value of securities without undervaluing or overvaluing them. When the quality and quantity of information increase, the market becomes more efficient, allowing it to reduce arbitrage and obtain higher market returns from investment. In a well-functioning market, everyone receives all information completely and immediately at no cost. It opens up a plethora of opportunities for investors to access various investment options.

Question

Question 3

Real rates. Determine the nominal rates for the three countries listed if they have the following inflation rates and the real rate the world over is 0.73%:
Canada: Inflation is 5.81%.
Switzerland: Inflation is 2.24%.
United States: Inflation is 4.29%.
According to the International Fisher effect, what is the approximate nominal rate in Canada?
% (Round to two decimal places.)
According to the International Fisher effect, what is the approximate nominal rate in Switzerland?
% (Round to two decimal places.)
According to the International Fisher effect, what is the approximate nominal rate in the United States?
% (Round to two decimal places.)

Expert Solution

Step 1

Given information :

Real rate over the world = 0.73%

Formula for international Fischer effect :

$(1 + N o m i n a l i n t e r e s t r a t e) = (1 + R e a l i n t e r e s t r a t e) (1 + I n f l a t i o n r a t e) T h e r e f o r e, N o m i n a l r a t e = [(1 + R e a l i n t e r e s t r a t e) (1 + I n f l a t i o n r a t e)] - 1$

Step 2

1. Nominal rate in Canada :

$N o m i n a l r a t e = [(1 + R e a l i n t e r e s t r a t e) (1 + I n f l a t i o n r a t e)] - 1 N o m i n a l r a t e = [(1 + 0.73 %) (1 + 5.81 %)] - 1 = 6.58 %$

Step 3

2. Nominal rate in Switzerland :

$N o m i n a l r a t e = [(1 + R e a l i n t e r e s t r a t e) (1 + I n f l a t i o n r a t e)] - 1 N o m i n a l r a t e = [(1 + 0.73 %) (1 + 2.24 %)] - 1 = 2.99 %$

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