QUESTION 8

Here are some statistics:

GBP() CHF

Inflation (annual rate) 10% 4%

One-year interest rate 12% ?%

Spot exchange rate (CHF per ) 3

Expected exchange rate (in one year) ?%

One-year forward exchange rate (CHF/) ?%

Based on the linear approximation of international parity relations, replace the question marks with appropriate answers.

QUESTION 9

An asset manager has conducted an extensive econometric study and proposes a forecasting model. He has found that a currency with a high interest rate tends to appreciate relative to a currency with a low interest rate. The simple forecasting model for the one-year exchange rate is that a currency should appreciate over the year by the amount of the interest rate differential quoted today. For example, if the Australian dollar exchange rate is AUD/$ = 2 and the one-year interest rates in AUD and $ are 8% and 4%, respectively, the U.S dollar should move up by 4% relative to the Australian dollar, and your forecast for the exchange rate at the end of the year is AUD/$ = 2.28. What is the current forward exchange rate? Show your work below.