1. Interest rates in Hong Kong and the United States In this question, you will check whether the uncovered interest parity holds in the real world. We focus on the interest rates in Hong Kong and the US.

(a) (5 points) Briefly explain why the uncovered interest parity implies that the interest rate in Hong Kong (??) should be equal to that in the US (???).

(b) (5 points) We will compare the federal funds rate in the US and the corresponding rate in Hong Kong. To download the data, first, go to the data archive run by Hong Kong Monetary Authority (https://www.hkma.gov.hk/eng/data-publications-andresearch/data-and-statistics/economic-financial-data-for-hong-kong/#financialSector). Find "Base Rate," and click "More Statistics" on the right. You can download "T070301.xls" file. We will use the "Discount Window Base Rate," which is available from Jun 1992 to September 2021. When cleaning your data, especially when deleting the empty cells, methods explained in the following link might be useful: https://www.extendoffice.com/documents/excel/4595-excel-delete-blank-cells-andmove-left.html.

(c) (5 points) To obtain the US data, go to FRED (https://fred.stlouisfed.org/series/FEDFUNDS). Set the date from Jun 1992 to September 2021 and download the data.

(d) (5 points) Draw a figure which shows the federal funds rate in the US and the discount window base rate in Hong Kong from Jun 1992 to September 2021. Label axis, specify units and add legends. Does the interest rate in Hong Kong tightly follow that in the US? (The uncovered interest parity does not take risk premium into account. Because 2 the US government bonds are safer than the Hong Kong government bonds, it is not surprising if you have ???

1. Interest rates in Hong Kong and the United States In this question, you will check whether the uncovered interest parity holds in the real world. We focus on the interest rates in Hong Kong and the US. (a) (5 points) Briefly explain why the uncovered interest parity implies that the interest rate in Hong Kong (i,) should be equal to that in the US (i;). (b) (5 points) We will compare the federal funds rate in the US and the corresponding rate in Hong Kong. To download the data, first, go to the data archive run by the Hong Kong Monetary Authority (https://www.hkma.gov.hk/eng/data-publications-and- research/data-and-statistics/economic-financial-data-for-hong-kong/#financialSector). Find "Base Rate," and click "More Statistics" on the right. You can download "T070301.xls" file. We will use the "Discount Window Base Rate," which is available from Jun 1992 to September 2021. When cleaning your data, especially when deleting the empty cells, methods explained in the following link might be useful: https://www.extendoffice.com/documents/excel/4595-excel-delete-blank-cells-and- move-left.html. (c) (5 points) To obtain the US data, go to FRED (https://fred.stlouisfed.org/series/FEDFUNDS). Set the date from Jun 1992 to September 2021 and download the data. (d) (5 points) Draw a figure which shows the federal funds rate in the US and the discount window base rate in Hong Kong from Jun 1992 to September 2021. Label axis, specify units and add legends. Does the interest rate in Hong Kong tightly follow that in the US? (The uncovered interest parity does not take risk premium into account. Because 1 the US government bonds are safer than the Hong Kong government bonds, it is not surprising if you have it