INTERNATIONAL MACROECONOMICS AND FINANCE CHOOSE THE OPTION FROM HIGHLIGHTED BELO
ID: 2759915 • Letter: I
Question
INTERNATIONAL MACROECONOMICS AND FINANCE
CHOOSE THE OPTION FROM HIGHLIGHTED BELOW:
1a.Suppose R, R* and E are respectively the domestic annual interest rate, the foreign annual interest rate and the spot exchange rate (domestic currency per foreign currency).
Based on uncovered interest parity, if the expectation of what the spot exchange rate will be a year from now stays the same and R* stays the same, then an increase in R should result in
an increase in the risk premium on domestic assets.
an decrease in the forward premium on foreign currency against the domestic currency.
an increase in E.
a decrease in the risk premium on domestic assets.
a decrease in E.
1b.
Suppose R, R* and E are respectively the domestic annual interest rate, the foreign annual interest rate and the spot exchange rate (domestic currency per foreign currency).
Based on covered interest parity, if the one-year forward exchange rate, F, and R* stay the same, then an increase in R should result in
an increase in the risk premium on domestic assets.
a decrease in the risk premium on domestic assets.
an increase in E.
a decrease in E.
an increase in the expectation of the spot exchange rate a year from now.
Explanation / Answer
an increase in the risk premium on domestic assets.
an increase in the expectation of the spot exchange rate a year from now.
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