QUESTION 1 Assume a Mexican investor observes the following situation: SR Curren

Question

QUESTION 1   

Assume a Mexican investor observes the following situation:

SR Current spot rate: Mex$15/$

US 1 year interest rate: .12

Mexico 1 year interest rate: .06

What should be the percentage change in the value of dollars in terms of pesos be according to International Fisher Effect (IFE)? Round intermediate steps and your final answer to four decimals and enter your response in a decimal format

******** SHOW WORK PLEASE, THANKS.

QUESTION 2

The nominal interest rate on a given investment is lower in New Zealand than an identical investment in Canada. Which of the following will occur according to the International Fisher Effect?

A. Expected inflation is lower in Canada than in New Zealand

B. Expected inflation is higher in Canada than in New Zealand

C. The New Zealand dollar will depreciate in nominal terms against the Canadian dollar

D. Cannot be determined

QUESTION 3

The International Fisher Effect assumes that nominal interest rates remain constant.

TRUE OR FALSE

QUESTION 4

The dollar/yen spot rate is $.004/¥ and the forward rate is $.006/¥. Which of the following must be true in order to prevent covered interest arbitrage?

A. Interest rates for investments of similar risk and maturity must be higher in Japan than the US.

B. Interest rates for investments of similar risk and maturity must be lower in Japan than the US.

C. Interest rates for investments of similar risk and maturity must be equal in Japan and the US.

D. Cannot be determined

Explanation / Answer

1.Percentage change=US interest rate-Mexico interest rate= 12% -6%=6%(approx)(appreciation in Mexico dollars)

Mexico dollars price=1.12/1.06*15=15.84,so increase in0.84, percentage is 0.84/15=0.056 or 5.6%.

2.B Expeced inflation is higher in Canada than in New Zealand

3.False.Nominal intererst rate is a combination of both real interest rate and inflation.

4.B.Interest rate for investents of similar risk and matuirity must be lower in japan than in the US.

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