Question
Suppose the New Zealand Dollar (NZ$) is trading at C$0.915/NZ$ in the spot exchange rate market. The (annual) nominal interest rates in New Zealand and
Suppose the New Zealand Dollar (NZ$) is trading at C$0.915/NZ$ in the spot exchange rate market. The (annual) nominal interest rates in New Zealand and Canada are 3.8% and 2.5% respectively. Expected (annual) inflation rate in Canada is 2.0%.
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(a) Suppose both FE and PPP are satisfied. What is the expected inflation rate in New Zealand? What is the expected spot exchange rate of NZ$ one year from today in terms of C$?
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(b) Now suppose investors consider investing in New Zealand being riskier than investing in Canada and they demand a risk premium of 1.5%. Suppose the market is currently in equilibrium given the required risk premium. Redo part (a). Assume PPP is still satisfied.
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International Corporate Reporting Global And Diverse
Authors: Pauline Weetman, Ioannis Tsalavoutas, Paul Gordon
5th Edition
1138364991, 9781138364998
