Please answer B&C A. Denote the one-year forward exchange rate (at time t) for time...
60.1K
Verified Solution
Link Copied!
Question
Accounting
Please answer B&C
A. Denote the one-year forward exchange rate (at time t) for time t+1 by F t+1. Suppose the nominal interest rate in the U.S. is 8%, the nominal interest rate in the U.K. is 5%, the current exchange rate E t is 0.67/$, and the forward exchange rate F t+1 is 0.625/$. Are the numbers given here consistent with the interest rate parity equation? Clearly show all calculations. Based on this information, would you prefer to invest in the U.S. or in the U.K.? (5 points)
0.625 = 0.67 x ((1+0.05)/ (1=0.08))
0.625 = 0.67 x 0.972
0.625 does not equal 0.6513
B. What effect will the difference between the effective rate of return in the two countries (if any) from part (a) have on the exchange rate (E ). Clearly show all calculations, and illustrate your answer using a well-labeled graph. (10 points)
C. Consider the exchange rate determined in part (b). Suppose that the Fed (the U.S. central bank) adopts a policy to lower the inflation rate by 2% in the U.S. Explain the effect of such a monetary policy on the exchange rate (E ). Clearly explain your answer, and illustrate your answer using a well labeled graph. (10 points)
Answer & Explanation
Solved by verified expert
Get Answers to Unlimited Questions
Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!
Membership Benefits:
Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
