BUSI 3233 - Homework assignment #3

Please keep four decimals for all FX rates, interest rates and rate of inflation, and two decimals for all dollar/foreign currency amounts.

Problem 1 The following information is given:

Forecast annual rate of inflation for Canada: 0.30% p.a.

Forecast annual rate of inflation for the US: 0.50% p.a.

Two-year interest rate Canada: 1.10% p.a.

Two-year interest rate U.S.: 0.32 % p.a.

Spot rate: CAD/USD 1.040

Forward rate 2 years: CAD/USD 1.050

Make a prediction on the spot exchange rate intwoyears based on PPP, IFE, and FEP.

Problem 2.Part 1. you need to assemble data for a country of your choice for at least 6 years, including 2018[1]. You can use World Bank Open Data or any other credible source. You need to collect data for the following items:

C/A

Exports

Imports

K/A

Errors

Reserves

Exchange rate

Inflation, domestic

Inflation, foreign

Part 2. Estimate how real exchange rate changed over any five-year period.

Part 3. Try to identify links between changes in nominal/real exchange rate and BOP accounts.

[1]You cant use Canada, Chile, Mexico.