1.A research institution has just published projected inflation rates for the United States and Germany for the next year. U.S. inflation is expected to be at 10% per year while German inflation is expected to be at 4% per year. If the current exchange rate is $0.95/€, what should be the exchange rate for the next years? 4. Suppose exchange rate for the British pound, Euro, and Australia dollar were $1.400, $1.225, and $0.875, respectively. At the time, the associated 90-day interest rates (annualized) were 12%, 6%, and 4%, while the U.S. 90-day interest rate (annualized) was 8%. What was the 90-day forward rate on a Dollar Currency portfolio (DCP) (DCP 1 = £1 + €1 + AU$1) if interest parity were to hold?
1.A research institution has just published projected inflation rates for the United States and Germany for the next year. U.S. inflation is expected to be at 10% per year while German inflation is expected to be at 4% per year. If the current exchange rate is $0.95/€, what should be the exchange rate for the next years? 4. Suppose exchange rate for the British pound, Euro, and Australia dollar were $1.400, $1.225, and $0.875, respectively. At the time, the associated 90-day interest rates (annualized) were 12%, 6%, and 4%, while the U.S. 90-day interest rate (annualized) was 8%. What was the 90-day forward rate on a Dollar Currency portfolio (DCP) (DCP 1 = £1 + €1 + AU$1) if interest parity were to hold?
Chapter4: Exchange Rate Determination
Section: Chapter Questions
Problem 23QA
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1.A research institution has just published projected inflation rates for the United States and
Germany for the next year. U.S. inflation is expected to be at 10% per year while German inflation
is expected to be at 4% per year. If the current exchange rate is $0.95/€, what should be the
exchange rate for the next years?
4. Suppose exchange rate for the British pound, Euro, and Australia dollar were $1.400, $1.225, and
$0.875, respectively. At the time, the associated 90-day interest rates (annualized) were 12%, 6%,
and 4%, while the U.S. 90-day interest rate (annualized) was 8%. What was the 90-day forward
rate on a Dollar Currency portfolio (DCP) (DCP 1 = £1 + €1 + AU$1) if interest parity were to
hold?
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