ChCCCS023 Support independence and well being Case Study
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- Subject Code :
ChCCCS023
Question 1
IFE. Beth Miller does not believe that the international Fisher effect (IFE) holds. Current one-year interest rates in Europe are 5 percent, while one-year interest rates in the U.S. are 3 percent. Beth converts $100,000 to euros and invests them in Germany. One year later, she converts the euros back to dollars. The current spot rate of the euro is $1.10.
- a. According to the IFE, what should the spot rate of the euro in one year be?
- b. If the spot rate of the euro in one year is $1.00, what is Beth’s percentage return from her strategy?
- c. If the spot rate of the euro in one year is $1.08, what is Beth’s percentage return from her strategy?
- d. What must the spot rate of the euro be in one year for Beth’s strategy to be successful?
Question 2
Integrating IRP and IFE. Assume the following information is available for the U.S. and Europe:
|
|
 |
|
|---|---|---|
|
Nominal interest rate |
4% |
6% |
|
Expected inflation |
2% |
5% |
|
Spot rate |
----- |
$1.13 |
|
One-year forward rate |
----- |
$1.10 |
U.S.- a. Does IRP hold?
- b. According to PPP, what is the expected spot rate of the euro in one year?
- c. According to the IFE, what is the expected spot rate of the euro in one year?
- d. Reconcile your answers to parts (a). and (c).
