1. According to covered interest rate parity, you can compute the equilibrium forward rate premium/discount using...
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1. According to covered interest rate parity, you can compute the equilibrium forward rate premium/discount using the interest rate differentials. Specifically, the equilibrium premium/discount can be stated as: [(F* - So)] So x100% + is) ((1 +17) - 1] x 1006 ip) Assume the current spot rate is $1.1300/€, the actual 6-moth forward rate is $1.0900/€, and the 6-month U.S. rate is 5% per annum with the 6-month France rate at 8% per annum. a) Compute the actual forward premium/discount using the actual exchange rates. b) Compute the implied equilibrium forward premium/discount using IRP. c) Based on your answers to parts a and b, is the euro at too much of a premium or discount? Given your answer, how could you take advantage of this situation using IRP? Just explain, no calculation required. 1. According to covered interest rate parity, you can compute the equilibrium forward rate premium/discount using the interest rate differentials. Specifically, the equilibrium premium/discount can be stated as: [(F* - So)] So x100% + is) ((1 +17) - 1] x 1006 ip) Assume the current spot rate is $1.1300/€, the actual 6-moth forward rate is $1.0900/€, and the 6-month U.S. rate is 5% per annum with the 6-month France rate at 8% per annum. a) Compute the actual forward premium/discount using the actual exchange rates. b) Compute the implied equilibrium forward premium/discount using IRP. c) Based on your answers to parts a and b, is the euro at too much of a premium or discount? Given your answer, how could you take advantage of this situation using IRP? Just explain, no calculation required.
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Related Book For
International Economics
ISBN: 978-1429278447
3rd edition
Authors: Robert C. Feenstra, Alan M. Taylor
Posted Date:
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