Beth Miller does not believe that the international Fisher effect (IFE) holds. Current one-year interest rates in

Question:

Beth Miller does not believe that the international (IFE) holds. Current one-year interest rates in Europe are 5 percent, while one year interest rates in the United States 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?

Fisher Effect
The Fisher Effect is an economic theory created by economist Irving Fisher that describes the relationship between inflation and both real and nominal interest rates. The Fisher Effect states that the real interest rate equals the nominal interest...