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Thomas who is a US investor, is contemplating investing some money in the UK, and is uncertain if the international Fisher effect (IFE) holds. Assume
Thomas who is a US investor, is contemplating investing some money in the UK, and is uncertain if the international Fisher effect (IFE) holds. Assume the following information: Spot rate of pound $1.39 1-year pound interest rate = 7% 1-year U.S. interest rate = 4% 1-year spot rate of the pound = $1.45 a) Determine whether International Fisher Effect (IFE) exists. (4 marks) b) According to IFE, is the quoted future spot rate too high or too low.? (4 marks) c) According to IFE, what would be the yield to Thomas, a US investor who invests in Europe if the spot rate is the rate predicted by IFE? (4 marks) d) If Thomas invests $1,000,000 and the spot rate of the pound in one year is indeed $1.45, what is his percentage return? (4 marks)
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