2) (20 marks] Short Questions. Provide all numerical answers correct to at least 3 decimal places. a) [2 marks] Assume that (i) the current spot exchange rate SpKK/EUR = 5.1526; (ii) the one-year interest rate for DKK is i = 4.1%; and (iii) the one- year interest rate for EUR is i* = X.X% (where XX are the last two digits of your student number, so if XX=49 then i* = 4.9%). What must the current expected value of the future DKK/EUR spot exchange rate Et(St+1,DKK/EUR) be for Uncovered Interest Parity (UIP) to hold? b) (4 marks] Assume that (i) the current spot exchange rate Seur/USD = 0.8341; (ii) the one-year interest rate for EUR is i = X.X% (where XX are the last two digits of your student number, so if XX=49 then i = 4.9%); and (iii) the one- year interest rate for USD is i* = 5.4%. i. What must the current one-year forward EUR/USD exchange rate (Ft+1,EUR/USD) be for Covered Interest Parity (CIP) to hold? ii. Assume that CIP holds and calculate the forward premium (or discount) of the EUR against the USD. c) [2 marks] The current value of the spot exchange rate St.NZD/AUD = 1.0XX (where XX are the last two digits of your student number). If the New Zealand (NZD) inflation rate for the coming year will be 3.5% while the Australian (AUD) inflation rate will be 1.7%, what value of the exchange rate St+1,NZD AUD 1 year from now would maintain Relative PPP? [4 marks] Assume that consum me only 2 items: Rent; Food. The overall price level is simply the sum of the prices of the two items. In New Zealand, rent for 1 year is NZD 1X,X00 (where XX are the last two digits of your student number, so if XX=49 then rent is NZD 14,900) and food for 1 year is NZD 8,600. In Australia, rent for 1 year is AUD 14,000 and food for 1 year is AUD 8,900: i. If the spot exchange rate is SAUD/NZD = 0.893, what is the real exchange rate between Australia and New Zealand (treat Australia as the domestic country)? ii. At value of the nominal exchange rate SAUD/NZD would Absolute PPP hold? e) [2 marks] Suppose the yield on a one-year bond is 3.2 per cent, the yield on a two-year bond is 4.3 per cent, and the two-year liquidity premium is 0.XX per cent (where XX are the last two digits of your student number). What is the market expecting the one-year bond yield to be in a year's time? f) [3 marks] Suppose the expected path of one-year nominal interest rates over the next four years is 3.8 percent, 3.5 percent, 2.9 per cent and 2.7 percent, and the four-year liquidity premium is 1.XX per cent (where XX are the last cons two digits of your student number). If expected inflation is 2.4 per cent, what is the real interest rate on a four-year bond? g) [3 marks] Suppose the expected path of one-year nominal interest rates over the next four years is Y percent, 5.3 percent, 5.0 per cent and 4.8 percent, and the four-year liquidity premium is 1.XX per cent (where XX are the last two digits of your student number). If expected inflation is 2.5 per cent, and the real interest rate on a four-year bond is 3.9 per cent, what is the value of Y? 2) (20 marks] Short Questions. Provide all numerical answers correct to at least 3 decimal places. a) [2 marks] Assume that (i) the current spot exchange rate SpKK/EUR = 5.1526; (ii) the one-year interest rate for DKK is i = 4.1%; and (iii) the one- year interest rate for EUR is i* = X.X% (where XX are the last two digits of your student number, so if XX=49 then i* = 4.9%). What must the current expected value of the future DKK/EUR spot exchange rate Et(St+1,DKK/EUR) be for Uncovered Interest Parity (UIP) to hold? b) (4 marks] Assume that (i) the current spot exchange rate Seur/USD = 0.8341; (ii) the one-year interest rate for EUR is i = X.X% (where XX are the last two digits of your student number, so if XX=49 then i = 4.9%); and (iii) the one- year interest rate for USD is i* = 5.4%. i. What must the current one-year forward EUR/USD exchange rate (Ft+1,EUR/USD) be for Covered Interest Parity (CIP) to hold? ii. Assume that CIP holds and calculate the forward premium (or discount) of the EUR against the USD. c) [2 marks] The current value of the spot exchange rate St.NZD/AUD = 1.0XX (where XX are the last two digits of your student number). If the New Zealand (NZD) inflation rate for the coming year will be 3.5% while the Australian (AUD) inflation rate will be 1.7%, what value of the exchange rate St+1,NZD AUD 1 year from now would maintain Relative PPP? [4 marks] Assume that consum me only 2 items: Rent; Food. The overall price level is simply the sum of the prices of the two items. In New Zealand, rent for 1 year is NZD 1X,X00 (where XX are the last two digits of your student number, so if XX=49 then rent is NZD 14,900) and food for 1 year is NZD 8,600. In Australia, rent for 1 year is AUD 14,000 and food for 1 year is AUD 8,900: i. If the spot exchange rate is SAUD/NZD = 0.893, what is the real exchange rate between Australia and New Zealand (treat Australia as the domestic country)? ii. At value of the nominal exchange rate SAUD/NZD would Absolute PPP hold? e) [2 marks] Suppose the yield on a one-year bond is 3.2 per cent, the yield on a two-year bond is 4.3 per cent, and the two-year liquidity premium is 0.XX per cent (where XX are the last two digits of your student number). What is the market expecting the one-year bond yield to be in a year's time? f) [3 marks] Suppose the expected path of one-year nominal interest rates over the next four years is 3.8 percent, 3.5 percent, 2.9 per cent and 2.7 percent, and the four-year liquidity premium is 1.XX per cent (where XX are the last cons two digits of your student number). If expected inflation is 2.4 per cent, what is the real interest rate on a four-year bond? g) [3 marks] Suppose the expected path of one-year nominal interest rates over the next four years is Y percent, 5.3 percent, 5.0 per cent and 4.8 percent, and the four-year liquidity premium is 1.XX per cent (where XX are the last two digits of your student number). If expected inflation is 2.5 per cent, and the real interest rate on a four-year bond is 3.9 per cent, what is the value of Y
