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Assume that interest rate parity exists. One year ago, the spot rate of the euro was $1.40, and the spot rate of the Japanese yen
Assume
that interest rate parity exists. One year ago, the spot
rate of the euro was $1.40, and the spot rate of the
Japanese yen was $.01. At that time, the one-year
interest rate of the euro and the Japanese yen was
3 percent, and the one-year U.S. interest rate was
7 percent. One year ago, you used the one-year forward
rate of the euro to derive a forecast of the future spot
rate of the euro and the yen one year ahead. Today the
spot rate of the euro is $1.39, while the spot rate of the
yen is $.009. Which currency did you forecast more
accurately?
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