Answered step by step
Verified Expert Solution
Question
1 Approved Answer
1) Spot exchange rate CHF 1.05/$ Swiss inflation rate (expected) p.a 0.75% USA inflation rate (expected) * p.a 2.25% a) Calculate the expected future spot
1) Spot exchange rate CHF 1.05/$ Swiss inflation rate (expected) p.a 0.75% USA inflation rate (expected) * p.a 2.25% a) Calculate the expected future spot rate and the expected (ex ante) nominal rate of change in the exchange rate following the relative PPP over this one year period. [2 marks] b) At the end of one-year period, the actual inflation rate turned out to be the same as expected inflation rate in both countries. However, the actual (ex-post) nominal exchange rate turns out to be CHF1.02/$. What was the real rate of appreciation (or depreciation) of the base currency over this one-year period? (2 marks) c) Based on your answers from (1) and (2), explain how the actual nominal rate of change deviates from the expected nominal rate of change can account for such deviations. (2 marks) 2) Suppose that the 90-day forward rate is $1.45/, the current spot rate is $1.42/, and you expect the future spot rate in 90 days to be $1.39/. What contract would you make to speculate in the forward market by either buying or selling 1,000? What is your expected dollar profit? (2 marks) ex
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started