Recall that the uncovered interest parity condition in year t is: - I 'HlF,t (1) IL where EHIEt is the spot exchange rate of Home currency per unit of Foreign cur- rency and EEt is the expected exchange rate of Home currency per unit of For- HIF,t eign currency in year t + 1. RH,t and Rft are the Home and Foreign interest rates in year t, respectively. a) Express the spot exchange rate EHIF2019 in terms of EE2019, RH,2019 and Rf2019 b) Assume that investors correctly expect the exchange rate in the next year. That is, 3 I (2) for any year t. Express the spot exchange rate EH|F,2019 in terms of EE2020 {RH,2019, RH,220} and {Rp2019, Rf2020}. c) Assume that RH,2019 = Rf2019, and R,2020 = Rf,2020 2%. In year 2019, the = Home central bank announces that RH.2020 will be increased from 2% to 3% in year 2020. How much does EHIE2019 change? d) Again, assume that Eq. (2) holds. Express the spot exchange rate EHIF,2019 in terms of E21 18' {RH,2019, , RH,2118} and {Rg2019, .. ., Rf2118}. e) Assume that initially, from year 2019 to year 2118, the Home and Foreign in- terest rates are the same. That is, for t 2019,..,2118. Now, in year 2019, the Home central bank announces that RH,2119will be increased by 1 percent in year 2118. How much does EHIE2019 change? Recall that the uncovered interest parity condition in year t is: - I 'HlF,t (1) IL where EHIEt is the spot exchange rate of Home currency per unit of Foreign cur- rency and EEt is the expected exchange rate of Home currency per unit of For- HIF,t eign currency in year t + 1. RH,t and Rft are the Home and Foreign interest rates in year t, respectively. a) Express the spot exchange rate EHIF2019 in terms of EE2019, RH,2019 and Rf2019 b) Assume that investors correctly expect the exchange rate in the next year. That is, 3 I (2) for any year t. Express the spot exchange rate EH|F,2019 in terms of EE2020 {RH,2019, RH,220} and {Rp2019, Rf2020}. c) Assume that RH,2019 = Rf2019, and R,2020 = Rf,2020 2%. In year 2019, the = Home central bank announces that RH.2020 will be increased from 2% to 3% in year 2020. How much does EHIE2019 change? d) Again, assume that Eq. (2) holds. Express the spot exchange rate EHIF,2019 in terms of E21 18' {RH,2019, , RH,2118} and {Rg2019, .. ., Rf2118}. e) Assume that initially, from year 2019 to year 2118, the Home and Foreign in- terest rates are the same. That is, for t 2019,..,2118. Now, in year 2019, the Home central bank announces that RH,2119will be increased by 1 percent in year 2118. How much does EHIE2019 change
