Exam 14: Exchange Rates in the Short Run

Suppose that the 12-month interest rates for the United States and the United Kingdom are 7% and 6% respectively,and E = 2.10 $/£. Given this information,what is the expected exchange rate change over the year?

Suppose we observe the following 1-year interest rates: Euro $ = 15% Euro SF = 12% The exchange rate is quoted as the dollar price of Swiss francs and is currently E = 0.40. (a) Given the information above,what is the 12-month forward rate? (b) Suppose the actual 12-month forward rate is not what you found from (a),but instead is $0.42. What would profit-seeking arbitrageurs do?

Suppose that the forward rate of Mexican pesos per dollar is selling flat,with both the spot and forward rates trading at 15 pesos per dollar.If the relevant interest rates for a foreign exchange speculator are 3 percent on dollars and 13 percent in pesos,a potential arbitrage operation would involve

We can expect very small deviations from interest rate parity in

In order to infer expected future exchange rates,we must have a forward exchange market in a currency.

The term structure relationships regarding different interest rates approximately reflect expected exchange rate changes.

The effective return from a foreign investment is

If the 12-month interest rates for the United States and the United Kingdom are 6% and equal,and £1 = $2 in the spot market,then what do you expect the 12-month forward rate to be?

Change in U.S.policy can lead to changes in inflationary expectations,interest rates,and exchange rates simultaneously as they all adjust to new equilibrium levels.

Suppose that the spot exchange rate for a foreign currency is equal to $120,while the interest rate in dollars is 2% and the interest rate in the foreign currency is 3%.What is the approximate forward rate that is consistent with this situation? A)$115.56 B)$124.44 C)$118.77 D)None of the above.

Give 3 reasons for deviations from IRP. Do these deviations indicate unexploited profit opportunities for investors?

Suppose that at some point the spot exchange rate is equal to 100 yen per one U.S.dollar,while the interest rate in dollars is 6% and the interest rate in yen is 1%.What is the approximate forward rate that is consistent with this situation?

The relationship that implies that the nominal interest rate is equal to the real interest rate plus expected inflation is called the

Deviations from interest rate parity occur due to

Interest differentials cause exchange rate changes.

A constant differential between the interest rates of two countries over different terms to maturity implies that future changes in the exchange rate are expected to occur at a(n)________ rate.

Interest rate parity holds well in the Eurocurrency market.

The higher the expected inflation rate in a country,the lower is the nominal interest rate in that country.

Careful studies of the data indicate that deviations from interest parity are

The relationship that says that the forward premium or discount is equal to the interest differential is