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ChCCCS023 Support independence and well being Case Study

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Added on: 2023-01-14 07:39:12
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    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:

 

U.S.

Nominal interest rate

4%

6%

Expected inflation

2%

5%

Spot rate

-----

$1.13

One-year forward rate

-----

$1.10

  • 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).

 

  • Uploaded By : Katthy Wills
  • Posted on : January 14th, 2023
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