If the interest rate in the US is 6% and in the UK is 5% and...
- If the interest rate in the US is 6% and in the UK is
5% and interest rate parity (IRP) holds, is the forward premium for
the dollar per pound positive or negative?
- Does the market expect the dollar to depreciate or appreciate relative to the pound?
Homework Answers
As per interest rate parity, an investor is indifferent between investing in two countries
I.e. any higher interest rate in one country is offset by corresponding decline in exchange rate
Since th interest rate in US is more when compared to UK, value of dollar will decline in relation to pound
I.e. dollar is expected to depreciate relative to Pound
Forward premium for dollar per pound will be negative
If the forward premium of dollars per pound is positive and IRP holds, are interest rates higher in the US or in the UK?...
If the forward premium of dollars per pound is positive and IRP holds, are interest rates higher in the US or in the UK?
The US 1-year interest rate is 5% per year and the 1-year UK interest rate is...
The US 1-year interest rate is 5% per year and the 1-year UK interest rate is 3%. The spot rate is $1.55/pound and the 1-year forward rate is $1.60/pound. The optimal strategy is for an investor to borrow pounds because the pound is at a forward premium The optimal strategy is for an investor to borrow dollars Interest Rate Parity holds, so there is no advantage to borrowing dollars or pounds The optimal strategy is to borrow pounds because UK...
Currently the spot exchange rate is $1.558 per pound (USD/GBP). The interest rate in the UK...
Currently the spot exchange rate is $1.558 per pound (USD/GBP). The interest rate in the UK is 6%. The one-year forward exchange rate is $1.5200/GBP. If interest rate parity holds, what must be the US interest rate for the same period?
The International Fisher Effect (IFE), Purchasing Power Parity (PPP) and Interest Rate Parity (IRP) are three...
The International Fisher Effect (IFE), Purchasing Power Parity (PPP) and Interest Rate Parity (IRP) are three very important theories in international finance, each with its own predictions and implication. Which of the following is correct? IRP suggests that a change in interest rate differential will not change the currency's forward premium/discount. According to purchasing power parity (PPP), if a foreign country's inflation rate is below the inflation rate at home, home country consumers will increase their imports from the foreign...
5. Suppose the interest rate in the US is 2% and the interest rate in Russia...
5. Suppose the interest rate in the US is 2% and the interest rate in Russia is 15%. In a year investors expect the exchange rate to be at Ep = 0.016. Suppose the UIP holds. What is the exchange rate today? 6. Exchange rates and shocks. Using the UIP expression you obtained answer the following questions: (a) Suppose the Central Bank of Russia announces its intentions to raise the interest rate. What will happen to Esp? Will the ruble...
If the interest rate in the U.S. is expected to be 5 percent for the next...
If the interest rate in the U.S. is expected to be 5 percent for the next year. The interest rate in the U.K. is expected to be 8 percent for the next year. Uncovered IRP suggests that the: Multiple Choice O U.S. dollar should depreciate against the pound by about 3 percent. O British pound should depreciate against the dollar and the dollar should appreciate against the pound, both by about 3 percent O British pound is should appreciate against...
investors in both the US and the UK require the same real interest rate, 3% on...
investors in both the US and the UK require the same real interest rate, 3% on their lending. there is a consensus in the capital market that the annual inflation rate is likely to be 2% in the US and 1.5% in the UK for the next three years. the spot exchange rate is currently 1.50 using panity conditions, what is the most likely forward dollar-pound exchange rate for one-year maturity?
Last week, the spot rate for Australian Dollars was 0.7306 USD/ 1 AUD. The 180-day (6...
Last week, the spot rate for Australian Dollars was 0.7306 USD/ 1 AUD. The 180-day (6 month) forward rate quoted in the market was for 0.7340 USD/1 AUD and the risk-free rate on 180-day securities was 2.90 percent APR for United States LIBOR and 1.96 percent APR for Australian LIBOR. (LIBOR rates are widely used as a reference rate for financial instruments.) Assume that the US is the home country. Are the quotes for AUD above relative to the USD...
The US interest rate is i$ = 3 % for the next year and the UK...
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Assume that the interest parity condition holds. Also assume that the one-year U.S. interest rate is...
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The International Fisher Effect (IFE), Purchasing Power Parity (PPP) and Interest Rate Parity (IRP) are three very important theories in international finance, each with its own predictions and implication. Which of the following is correct? IRP suggests that a change in interest rate differential will not change the currency's forward premium/discount. According to purchasing power parity (PPP), if a foreign country's inflation rate is below the inflation rate at home, home country consumers will increase their imports from the foreign...
5. Suppose the interest rate in the US is 2% and the interest rate in Russia is 15%. In a year investors expect the exchange rate to be at Ep = 0.016. Suppose the UIP holds. What is the exchange rate today? 6. Exchange rates and shocks. Using the UIP expression you obtained answer the following questions: (a) Suppose the Central Bank of Russia announces its intentions to raise the interest rate. What will happen to Esp? Will the ruble...
If the interest rate in the U.S. is expected to be 5 percent for the next year. The interest rate in the U.K. is expected to be 8 percent for the next year. Uncovered IRP suggests that the: Multiple Choice O U.S. dollar should depreciate against the pound by about 3 percent. O British pound should depreciate against the dollar and the dollar should appreciate against the pound, both by about 3 percent O British pound is should appreciate against...
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