Question
25. Assume the following information is available for the United States and Europe: Nominal interest rate 4% 6% U.S. Nominal interest rate is 4% while
25. Assume the following information is available for the United States and Europe:
Nominal interest rate 4% 6%
U.S. Nominal interest rate is 4% while european Nominal interest rate 6%
U.S Expected inflation is 2% while european Expected inflation 5%
U.S Spot rate is unavailable while european spot rate is $1.13
US One-year forward rate is unavailable while european One year forward is $1.10
a. Does IRP hold? b. According to PPP, what is the expected spot rate of the euro in one year? c. According to the IFE, what is the expected spot rate of the euro in one year? d. Reconcile your answers to parts (a) and (c).
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