Question
The one-year interest rate is 6% in the U.S. and 3% in the Eurozone. On the other hand, the one-year inflation is 5% in the
- The one-year interest rate is 6% in the U.S. and 3% in the Eurozone. On the other hand, the one-year inflation is 5% in the U.S. and 4% in the Eurozone. The spot exchange rate is $1.10/.
a) What is the equilibrium one-year forward exchange rate based on Interest Rate Parity (IRP)? (20points)
b) What is the equilibrium one-year forward exchange rate based on Purchasing Power Parity (PPP)? (20points)
b) Figure out the one-year forward premium/discount for euro using the forward exchange rate based on IRP. (20points)
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Finance A Quantitative Introduction Volume 1
Authors: Piotr Staszkiewicz, Lucia Staszkiewicz
1st Edition
0128015845, 978-0128015841
