From our discussion of the Fisher effect in Chapter 7, we know that the actual relationship between
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From our discussion of the Fisher effect in Chapter 7, we know that the actual relationship between a nominal rate, R, a real rate, r, and an inflation rate, h, can be written as:
This is the domestic Fisher effect.
a. What is the nonapproximate form of the international Fisher effect?
b. Based on your answer in (a), what is the exact form for UIP?
c. What is the exact form for relative PPP?
d. Recalculate the NPV for the Kihlstrom drill bit project using the exact forms for UIP and the international Fisher effect. Verify that you get precisely the same answer either way.
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ANSWER a The nonapproximate form of the international Fisher effect is 1 r 1 R 1 S 1 h where r is th...View the full answer
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Related Book For 
Fundamentals of corporate finance
ISBN: 978-0073382395
9th edition
Authors: Stephen Ross, Randolph Westerfield, Bradford Jordan
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