Consider the following formula E₁st-st/8 = if - i. it, £/$ £/$ where st St £/$ is the logarithm of the nominal exchange rate in period t defined as pounds per dollar, it is the short term interest rate in the UK and it is the short term interest rate in the US.
Consider the following formula E₁st-st/8 = if - i. it, £/$ £/$ where st St £/$ is the logarithm of the nominal exchange rate in period t defined as pounds per dollar, it is the short term interest rate in the UK and it is the short term interest rate in the US.
Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
14th Edition
ISBN:9781305506381
Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Chapter6: Managing In The Global Economy
Section: Chapter Questions
Problem 12E
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Question
Solve the question given in the picture.

Transcribed Image Text:Consider the following formula
£/$
Et st+1
where St
£/$
St = if — it,
£/$ is the logarithm of the nominal exchange rate in period t defined
as pounds per dollar, it is the short term interest rate in the UK and it is the
short term interest rate in the US.

Transcribed Image Text:Consider augmenting the equation as follows:
£/$
Etst/i-sf/8 - (if - i)
£/$
st+1
St
2) What is pt?
a) The Fed Funds rate
b) The equity premium
c) The currency risk premium
d) None of the above
= Pt.
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