Question
help ASAP Suppose that the world consists of three countries, A, B, and C. Nominal interest rates, spot rates, and forward rates are (iA ,
help ASAP
Suppose that the world consists of three countries, A, B, and C. Nominal interest rates, spot rates, and forward rates are (iA , iB , iC , EA/B , EA/C , FA/B , FA/C ) = (0.02, 0.05, 0.01, 0.70, 1.21, 0.67, 1.30). Since we are working with small numbers, keep things to 4 decimal points (e.g., 1.00005 rounds to 1.0001). Recall that EX/Y tells you how many X$ you get for Y$1, and FX/Y tells you the guaranteed rate at which you can exchange currencies in the future.
1. Calculate E[EA/B,t+1] if uncovered interest rate parity were to hold.
2. Calculate E[EA/C,t+1] if uncovered interest rate parity were to hold.
Suppose covered interest rate parity holds. All of the values given in the question are unchanged except EA/C which are unknown and must be solved for.
3. Calculate EA/C.
4. Calculate E[EA/C,t+1] if uncovered interest rate parity were to hold as well.
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