Suppose the spot rate and the 1-year forward rates for the euro are €0.88/$ and €0.95/$...
- Suppose the spot rate and the 1-year forward rates for the euro are €0.88/$ and €0.95/$ (i.e. 0.95 euros per dollar).
- (2 points) Is the euro expected to get stronger or weaker? Why?
- (3 points) What would you estimate is the difference between inflation rates in the US and Europe (i.e., inflation(US) – inflation(Europe))?
Homework Answers
1.
As forward rate is more euros per dollar so it means euro will get
weaker i.e., one euro is able to buy less dollar
2.
The currency with higher inflation weakens hence Europe will have
higher inflation
So, inflation US-inflation Europe will become more negative
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