Question

Following are currency exchange “crossrates” between pairs of major currencies. Currency cross rates include both direct and indirect methods for expressing relative exchange rates.
a. Fill in the missing exchange rates in the crossrates table.
b. If the inflation rate is expected to be 3 percent in the European Monetary Union
(EMU) and 4 percent in the United States next year, estimate the forward rate of one euro in U.S. dollars one year from now.
c. If the one-year government interest rate is 6 percent in Japan and 4 percent in the United Kingdom, estimate the amount of Yen that will be needed to purchase one British pound one year from now.
d. Based solely on purchasing power parity (PPP), calculate the expected one-year inflation rate in the U.S. if the Swiss inflation rate is expected to be 3.5 percent next year, and the one-year forward rate of a Swiss franc is $.6100.
e. Assume the U.S. dollar is expected to depreciate by 15 percent relative to the euro at the end of one-year from now and the interest rate on one-year government securities in the EMU is 5.5 percent. What would be the current U.S. one-year government security interest rate based solely on the use of interest rate parity to forecast forward currency exchange rates?


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  • CreatedMarch 27, 2015
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