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9. Suppose that Also, Cov(A::+1, n+1) is estimated at 0.16, and the payoff Pt+1 is either 1200 or 1000 with probability 0.5. The risk-free rate
9. Suppose that Also, Cov(A::+1, n+1) is estimated at 0.16, and the payoff Pt+1 is either 1200 or 1000 with probability 0.5. The risk-free rate is 2%. Compute the asset price Pt. 10. The utility function is given by where C, is the consumption level at time t and p is a constant. Suppose that the expected stock return is 6% and the riskfree rate is 2%. The standard errors of the consumption growth and stock return are 0.02 and 0.1, respectively. The correlation between the consumption growth and the stock return is 0.5. Compute p satisfying the CAPM. 8. According to the UIP, the spot nominal exchange rate at time t, 8,3 is determined as E[St+1] (1) where it is the domestic nominal interest rate at time t, if is the foreign nominal interest rate at time t, and Eg[S+1] is the expected nominal exchange rate at time t + 1 conditioned on the information at time it. (8-1) Show that the UIP in equation (1) implies the following equations (2') and (it): . _ (1+ 3?) (1 + $1) (3)83 _ (1 +3g) (1 ++l) X E[St+2] .. _ (1+2: (ma) (mam) (\")83 (1+ 1:) (1 + 3':+1) X X (1 + [itfoo) X IEJSHOO] Hint: Assume that the future domestic and foreign interest rates are known at time t, and use the property lEt [Et+1[Sg+2]] = Eg[33+2]. (8-2) How would you interpret the equation (it)? (8-3) Because of the announcement of the Fed's QE tapering policy, the US short-term nominal interest rate is expected to rise this year. Ana- lyze the impact of the Fed's QE tapering policy announcement on the spot KRW/USD nominal exchange rate using the UIP
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