3. Please refer to the data below on exchange rates and interest rates for US, Europe,...
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3. Please refer to the data below on exchange rates and interest rates for US, Europe, Japan, and UK, taken from FT for 2/22/21. a. Using this data, calculate the implied two-year ahead forward exchange rate between the dollar and the three other currencies, using Covered Interest Parity. (Notice that the two-year rate is quoted on an annual basis, and in percentage terms.) b. Uncovered Interest Parity says that the forward rate should be an unbiased estimate of the future exchange rate. According to this theory, which currencies are expected to appreciate against the dollar, and which to depreciate? c. In empirical fact, UIP seems not to hold, though there is not agreement on why not. Usually the low yielding currencies do not appreciate as much (relative to the high yielding currencies) as the relationship would lead you to expect. If you were a bank, how might you try to profit from this empirical failure, by writing loans in one currency and funding them in a different currency? Currencies Major cross rates 1 GBP £ 1 EUR € 1 USD $ 1 AUD A$ European Union EUR 1.1557 N/A 0.8241 0.6497 Bonds & rates Country Europe Japan United Kingdom United States Japan JPY United Kingdom GBP 148.03 N/A 128.07 0.8650 105.56 0.7129 83.22 0.5621 2-year yield -0.68% -0.11% 0.05% 0.11% United States USD 1.4023 1.2132 N/A 0.7884 3. Please refer to the data below on exchange rates and interest rates for US, Europe, Japan, and UK, taken from FT for 2/22/21. a. Using this data, calculate the implied two-year ahead forward exchange rate between the dollar and the three other currencies, using Covered Interest Parity. (Notice that the two-year rate is quoted on an annual basis, and in percentage terms.) b. Uncovered Interest Parity says that the forward rate should be an unbiased estimate of the future exchange rate. According to this theory, which currencies are expected to appreciate against the dollar, and which to depreciate? c. In empirical fact, UIP seems not to hold, though there is not agreement on why not. Usually the low yielding currencies do not appreciate as much (relative to the high yielding currencies) as the relationship would lead you to expect. If you were a bank, how might you try to profit from this empirical failure, by writing loans in one currency and funding them in a different currency? Currencies Major cross rates 1 GBP £ 1 EUR € 1 USD $ 1 AUD A$ European Union EUR 1.1557 N/A 0.8241 0.6497 Bonds & rates Country Europe Japan United Kingdom United States Japan JPY United Kingdom GBP 148.03 N/A 128.07 0.8650 105.56 0.7129 83.22 0.5621 2-year yield -0.68% -0.11% 0.05% 0.11% United States USD 1.4023 1.2132 N/A 0.7884
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Managerial Accounting
ISBN: 978-0078111006
14th edition
Authors: Ray Garrison, Eric Noreen and Peter Brewer
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