A. As a Greck citizen, you observe that the one-year nominal interest rates in Euro area...

 

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A. As a Greck citizen, you observe that the one-year nominal interest rates in Euro area and two other European currencies for 2019 are those reported in table 1: Table 1. One-year interest rates (%) Euro (€) UK pound sterling (£) Swiss franc (CHF) -0.27 1.01 -0.56 a) Using only official international data sources regarding exchange rates (such as Eurostat, IMF) and assuming that the no-arbitrage condition holds, calculate the one-year euro forward exchange rate for 2019. [Mark 0.5] b) Assume now that the one-year euro forward exchange rates determined by the forces of supply and demand are depicted in table 2. Where is the best place to borrow or lend money? Calculate for each individual country the net profits of a 3.5 million € arbitrage transaction. Should you invest in the UK or in Switzerland? (Consider you have no money and you need to get a loan of 3.5 million euros from a Eurozone bank – or raising money through a loan equivalent 3.5 million euros by a UK or Swiss bank - at the respective interest rate reported in table 1.) [Mark 1.5] Table 2. One-year market forward exchange rates UK pound sterling (£) Swiss franc (CHF) 1.15 0.88 B. During a short travel in central Europe you visit the Czech Republic and Hungary and you realize that the same representative basket of goods and services costs 470 Czech Korunas (CZK) and 4,420 Hungarian Forints (HUF). You also know that the nominal exchange rates of the two currencies against the euro are EesczK = 0.0397 and Ee/HuF = 0.0030. Calculate the exchange rate that is consistent with the PPP and the real exchange rate of CZK with respect to HUF. If PPP holds in the long-run, which country will gain competitiveness during the adjustment to the long-run equilibrium, and by how much? [Mark 1.5] Note: Round your answers to the third decimal point. A. As a Greck citizen, you observe that the one-year nominal interest rates in Euro area and two other European currencies for 2019 are those reported in table 1: Table 1. One-year interest rates (%) Euro (€) UK pound sterling (£) Swiss franc (CHF) -0.27 1.01 -0.56 a) Using only official international data sources regarding exchange rates (such as Eurostat, IMF) and assuming that the no-arbitrage condition holds, calculate the one-year euro forward exchange rate for 2019. [Mark 0.5] b) Assume now that the one-year euro forward exchange rates determined by the forces of supply and demand are depicted in table 2. Where is the best place to borrow or lend money? Calculate for each individual country the net profits of a 3.5 million € arbitrage transaction. Should you invest in the UK or in Switzerland? (Consider you have no money and you need to get a loan of 3.5 million euros from a Eurozone bank – or raising money through a loan equivalent 3.5 million euros by a UK or Swiss bank - at the respective interest rate reported in table 1.) [Mark 1.5] Table 2. One-year market forward exchange rates UK pound sterling (£) Swiss franc (CHF) 1.15 0.88 B. During a short travel in central Europe you visit the Czech Republic and Hungary and you realize that the same representative basket of goods and services costs 470 Czech Korunas (CZK) and 4,420 Hungarian Forints (HUF). You also know that the nominal exchange rates of the two currencies against the euro are EesczK = 0.0397 and Ee/HuF = 0.0030. Calculate the exchange rate that is consistent with the PPP and the real exchange rate of CZK with respect to HUF. If PPP holds in the long-run, which country will gain competitiveness during the adjustment to the long-run equilibrium, and by how much? [Mark 1.5] Note: Round your answers to the third decimal point.

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ANSWER A a Step 1 Formula to calculate forward exhange rate is equals to Spot rate x 1 foreign inter... View the full answer