Suppose the 1-year domestic interest rate is 0.28, keeping in mind that means (100\times×0.28)%. Suppose also that the 1-year expected exchange rate is 59, and the current spot exchange rate is 50, both measured in domestic currency per foreign currency. What is the 1-year foreign interest rate according to uncovered interest parity?
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- Let in and if represent the nominal 1-year interest rates for a home and foreign country, respectively. According to the international Fisher effect (IFE) theory, which of the following best represents the predicted change in the foreign currency ef? O ○ ef = ef = 1-in 1-i 1+if 1+i - - 1 1 ○ ef 1+in ○ ef = +1 1+i ○ ef = 1+in 1+if - 1A. Suppose the dollar interest rate and the euro interest rate are the same and equal 2 percent per year. Suppose the expected future $/€ exchange rate is $1.20 per 1 €. Suppose now Euro interest rate decreases to 1 percent per year. Determine how the new equilibrium $/€ exchange rate will change if the US interest rate remains constant. B. Indicate how the change in the Euro interest rate will affect the equilibrium $/€ exchange rate and the expected return on euro assets. Explain the changes on the graph.Suppose the current USD/EUR spot exchange rate is 1.20$/ €. At the same the euro interest rate amount to 10% per year while the dollar interest rate is 0% per year. a. What is the no-arbitrage one-year USD/EUR forward exchange? b. Suppose the one-year USD/EUR forward exchange was 1.25$/ €. How could you make money from this situation? 4
- 2. Assume the following exchange rates: Currencies MXN/USD MXN/JPY JPY/USD Is triangular arbitrage possible? If so, how much is your profit in USD if you start with $1,000,000? Exchange Rate 0.0470 5.2300 0.0088Suppose that investors are risk-neutral and the linear UIP equation holds. You are given the following information: UK interest rate: i = 0.07 US interest rate: i* = 0.02 Expected future spot rate e^e = 8. What is the current spot rate, e? (State your answer as a number to 2 decimal places. Exchange rates are Pounds per Dollar, in natural logs)Use the information below to answer the following questions. Currency per U.S. $ 1.2380 1.2353 Australia dollar 6-months forward Japan Yen 6-months forward U.K. Pound 6-months forward 100.3600 100.0200 .6789 .6784 Suppose interest rate parity holds, and the current six month risk-free rate in the United States is 5 percent. Use the approximate interest rate parity equation to answer the following questions. a. What must the six-month risk-free rate be in Australia? (Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What must the six-month risk-free rate be in Japan? (Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. Australian risk-free rate b. Japanese risk-free rate c. Great Britain risk-free rate c. What must the six-month risk-free rate be in Great Britain? (Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) % % %
- Suppose the dollar interest rate and the pound sterling interest rate are the same, 6 percent per year. What is the relation between the current equilibrium dollar/pound exchange rate and its expected future level? O A. Expected dollar/pound exchange rate is higher than the current one. O B. Expected dollar/pound exchange rate is lower than the current one. C. Expected dollar/pound exchange rate is equal to the current one. O D. One cannot tell given the information above. Suppose the expected future exchange rate, $1.44 per pound, and the US interest rate remain constant, while Britain's interest rate rises to 8 percent per year. What is the new equilibrium dollar/pound exchange rate? New equilibrium exchange rate is $ per pound. (Enter your response to the nearest penny.)Assume the following exchange rates: Currencies Exchange Rate MXN/USD 0.0470 MXN/JPY 5.2300 JPY/USD 0.0088 Is triangular arbitrage possible? If so, how much is your profit in USD if you start with $1,000,000?Market observes the “exchange rates” as of today:($1/$0)=0.95 , ($2/$0)=0.87 1. What is the implied interest rate between time t=0 and t=2 ? 2. Now there is a project with three certain cashflows:CF0=−$10MMCF1=$5MMCF2=$7MMWhat is NPV0? 3. How much is CF1 worth at t=2?
- α) Suppose that the annual interest rate of the Euro (€) is 2% and the annual interest rate of the US Dollar ($) is 1%. The current $/€ exchange rate is $1 = €1.10. The expected exchange rate from a European investor after one year is 1.10 5 (1$= 1.105€). Is there arbitrage margins from the point of view of a European investor provided that his expectation for the future exchange rate is verified? Show what this investor can do.Suppose that the interest rates in the U.S. and Germany are equal to 5%, that the forward (one year) value of the € is F$/€ = 1$/€ and that the spot exchange rate is E$/€ = 0.75$/€. Please answer the following questions by explaining all steps of your analysis: Does the covered interest parity condition hold? Why or why not? How could you make a riskless profit without any money tied up assuming that there are no transaction costs in buying and or selling foreign exchange? PLEASE SHOW ALL STEPSLet a flexible exchange rate system. Assume a current account deficit of $100 billion. Then the capital account balance must be a . a surplus of something more than $100 million. b . a deficit of $100 billion. c . a surplus of $100 billion. d . None of the answers is correct