(a) Select an old issue of The Economist, and choose a few currencies/countries. Use the Uncovered Interest Parity together with the reported interest rates and the spot exchange rates to make a prediction for exchange rates in a year's time.

(b) Use The Economist issue published in one year's time to check the quality of your forecast. Compute the percentrage deviation of the realized spot rates from your predictions.

(c) Repeat (a) and (b) for several years. Plot the evolution of your forecast exchange rate, realized exchange rate, and the forecast errors over time for each currency. Does UIP seem to be a good predictor of the future exchange rates?

Data Sets

19 May 2007

Interest Rates %, 10-year gov't bonds, latest

Currency Units, per USD$

United States

4.71%

-

China

3.65%

7.68/per USD

Japan

1.66%

121/per USD

UK

5.10%

0.50/per USD

Canada

4.25%

1.10/per USD

May 24, 08

Interest Rates %, 10-year gov't bonds, latest

Currency Units, per USD

United States

3.82%

China

4.41%

6.96/per USD

Japan

1.61%

103/per USD

UK

4.87%

0.51/per USD

Canada

3.69%

0.98/per USD

May 16, 09

Interest Rates %, 10-year gov't bonds, latest

Currency Units, per USD

United States

3.10%

China

3.37%

6.82/per USD

Japan

1.45%

96.1/per USD

UK

3.51%

0.66/per USD

Canada

3.25%

1.17/per USD

23 Oct 2010

Interest Rates %, 10-year gov't bonds, latest

Currency Units, per USD

United States

3.56%

China

3.08%

6.83/per USD

Japan

1.30%

93.1/per USD

UK

3.84%

0.67/per USD

Canada

3.59%

1.02/per USD

Interest Rates %, 10-year gov't bonds, latest

Currency Units, per USD

United States

3.22%

China

3.95%

6.49/per USD

Japan

1.20%

81.1/per USD

UK

3.38%

0.61/per USD

Canada

3.20%

0.96/per USD