Answered: Suppose that the spot price of the euro…

Suppose that the spot price of the euro is currently $1.10. The 1-year futures price is $1.15. Is the interest rate higher in the United States or the euro zone?

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter7: International Arbitrage And Interest Rate Parity

Section: Chapter Questions

Problem 15QA

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Suppose current one-year interest rate in Europe is 5%, whereas one-year interest rate in the U.S. is 3%. Assume the current spot price of euro (EUR) is $1.10. Answer questions a) and b) below. If the exchange rate movement is consistent with the international Fisher effect (IFE), what will the spot price of EUR in one year be? Consider a trader who does not believe the IFE holds. The trader has decided to borrow $110,000 to invest in EUR-denominated deposits for one year without hedging. Recall the current EUR spot rate is $1.10. If the EUR spot rate in one year turns out to be $1.09, what will be the percentage return on this trading strategy?
Please use the data below, to answer the following question. Interest rate in US (Rh): Interest rate in Euro Zone (Rh): The current spot rate for EUR (SO): The expected spot rate for EUR 1 year later (S₁): What is the uncovered rate of return from the Euro Zone point of view (Ruf)? O 3.37% O 11.80% O 0.48% 7.5% 3.5% $1.25 $1.30 7.64%
A. 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 $/€ exchange rate and the expected return on euro assets. Explain the changes on the graph.
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Suppose that the Eurozone is the domestic country and the United States is the foreign country. The spot exchange rate quote is S=e:$ = $1.25. Suppose further that the expected annual U.S. inflation rate is 8.91 percent and the expected Eurozone annual inflation rate is 12.87 percent. Calculate the expected spot rate and the approximate expected spot rate one year away
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