Question: Explain how a nominal effective exchange rate index is constructed
Explain how a nominal effective exchange rate index is constructed.
Answer to relevant QuestionsWhat formula is used to convert a nominal effective exchange rate index into a real effective exchange rate index? Define interest rate parity. What is the relationship between interest rate parity and forward rates? Why would one company with interest payments due in pounds sterling want to swap those payments for interest payments due in U.S. dollars? Why would anyone write an option, knowing that the gain from receiving the option premium is fixed, but the loss, if the underlying price goes in the wrong direction, can be extremely large? Explain how the asset market approach can be used to forecast future spot exchange rates. How does the asset market approach differ from the BOP approach to forecasting?
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