Question
Suppose you are a currency speculator trying to forecast what will happen to the value of the dollar over the next year. Suppose all of
Suppose you are a currency speculator trying to forecast what will happen to the value of the dollar over the next year. Suppose all of our usual theories hold (uncovered, covered and real interest rate parities, absolute and relative purchasing power parities, as well as the Fisher effect for nominal interest rates).
For each of the separate cases below, use the information in that case to compute the expected depreciation of the dollar , or state if there is not enough information. State the name of the parity condition(s) you use and show your work.
- Expected inflation over the next year is expected to be 1% in the U.S. and -1% in Europe.
- The nominal interest rate in the U.S. for a 1-year dollar deposit is 3%, and that for a euro deposit is 2%.
- The current spot exchange rate is 1 dollar per euro, and the forward rate for a year from now is 1.1 dollars per euro.
Step by Step Solution
3.46 Rating (153 Votes )
There are 3 Steps involved in it
Step: 1
Answers Relative purchasing power parity relates the two countries exchange rate with its inflation ...Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started