Assume the following information for Australia and the United States of America where AUD represents Australian dollar
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Question:
- Assume the following information for Australia and the United States of America where AUD represents Australian dollar and USD represents US dollar.
AUSTRALIA
UNITED STATES
Nominal Interest rate
1.50%
0.78%
Expected Inflation
1.30%
1.60%
Spot rate
1AUD = 0.7536 USD
One-year forward rate
1AUD = 0.7482 USD
- Does IRP hold? Justify your answer with any appropriate calculations and explain (2 marks)
- According to the International Fischer Effect (IFE), what is the expected spot rate of the AUD in one-year? (2 marks)
- Suppose that the price level in Canada is CAD 16,600, the price level in France is EUR 11,750, and the spot exchange rate is 1 EURO = 1.35 CAD i.e. EUR/CAD 1.35.
- What is the implied exchange rate of EUR/CAD that satisfies absolute PPP? (2 marks)
- Is the euro overvalued or undervalued relative to the Canadian dollar? (2 marks)
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