This question uses the Fisher relationships and the theory of
uncovered interest parity. Suppose expected inflation in the U.S.
is 2% and expected inflation is 3.2% in the eurozone. The real
interest rate is 1.4%. What is the expected change in the value of
the euro?
Euro interest rate = real rate + inflation = 1.4%+3.2%=4.6%
US interest rate = real rate + inflation = 1.4%+2%=3.4%
Expected % change in value of Euro = Euro interest rate - US interest rate / (1+ US interest rate) = 4.6%-3.4% / (1+3.4%) = 1.16% depreciation (since inflation in Euro is more than US)
This question uses the Fisher relationships and the theory of uncovered interest parity. Suppose expected inflation in t...
Suppose that the uncovered interest parity condition holds and the expected exchange rate between the euro and the dollar in one year is 1.50 (€1 = $1.50). Using the exact formula, determine the current EUR/USD exchange rate when the interest rate is 4% in the Euro area and 5% in the USA. (Answer using 4 decimal pla
Assume that uncovered interest rate parity holds between the Japanese yen and the U.S. dollar. If today the 1-year riskless interest rate in Japan is 5%, the one-year riskless interest rate in the U.S. is 1%, and the spot exchange rate is $.01 per yen, what is the expected exchange rate one-year from today? Suppose that expected inflation in the U.S. increased. What would happen to the current (spot) exchange, i.e. will it increase or decrease? Explain your reasoning.
a) If the dollar is expected to appreciate against the yen, uncovered interest parity implies that the U.S. nominal interest rate must be greater than the Japanese nominal interest rate.
Question 3: The Quantity Theory and the Fisher Effect [16 Points) Suppose that in El Salvador the velocity of money is constant, real GDP falls by 1.4% per year, the stock on money grows by 8.9% per year, and the nominal interest rate is 4.5%. (a) According to the quantity theory, what must the inflation rate be in El Salvador? [4 Points] (b) Calculate the real interest rate in El Salvador [2 Points] (e) Suppose that the central bank decides...
Suppose you are a currency speculator trying to forecast what will happen to the value of the dollar over the next year. Suppose all of our usual theories hold (uncovered, covered and real interest rate parities, absolute and relative purchasing power parities, as well as the Fisher effect for nominal interest rates). For each of the separate cases below, use the information in that case to compute the expected depreciation of the dollar , or state if there is not...
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...
SECTION L(3) Answer all questions Under the uncovered interest parity theory, explain why holding interest rates constant), a nise in the expected depreciation in a country's currency leads to depreciation of that currency today? Because Rd = Raht Ealf-Zulfi Elff it hobl the interest rates and appreciation no change Increase the interest rate will decrease Edlf. I
We observe the following market data for the U.S. and Switzerland. The Fisher relationship holds. • annual U.S. inflation = ??? • one-year U.S. interest rate = 3.95% • annual Swiss inflation = 0.12% • one-year Swiss interest rate = 0.80% The spot SFr/$ is 1.2306. What is the annual U.S. inflation? What is the expected spot SFr/$ in one year according to uncovered interest parity?
Given the information above about the Dutch investor, and if Uncovered Interest Rate Parity holds, what is the expected change of the euro against the pound over one year? Consider a Dutch investor with 1,000 euros to place in a bank deposit in eitherthe Netherlands or Great Bntain The one-year interest rate on bank deposits is 2% in Britain and 4.04% in the Netherlands. The one-year forward euro-pound exchange rate is 1.575 euros per pound, and the spot rate is...
(a) Suppose that the Fisher hypothesis holds for an economy that has an expected real interest rate r of 2%. For each of the expected inflation rates πe of 2, 4, 6, 8, and 10%, calculate the nominal interest rate i and the after-tax expected real interest rate ia if a tax rate t of 20% is imposed on the nominal interest rates. (b) Discuss the possible societal effects of taxes on nominal interest rates.