The international Fisher effect (IFE) states that the expected changes in the ex

Question

The international Fisher effect (IFE) states that the expected changes in the exchange rate between two currencies in a certain time period is approximately equal to the difference in the interest rates in the two countries in the same period. If E is the expected change in the exchange rate between two currencies, h is the expected nominal Interest rate in the home country, i is the expected nominal interest rate in the foreign country, ITh is the expected inflation rate in the home country, and Tir is the expected inflation rate in the foreign country, the best representation of the international Fisher effect would be: Suppose you work for a Swiss-based company and need to calculate the expected yield on one-year U.S. Treasury Bills. You've collected the following required information for your computations. Based on your understanding of the IFE relationship, calculate the expected yield on the bond. Value Spot rate (Swiss franc per U.S. dollar) One-year future spot rate (Swiss franc per U.S. dollar) 0.8297 CHF/USD Expected yield on one-year Swiss government bond Expected yield on one-year U.S. Treasury Bill 0.8734 CHF/USD 3.00% Fiash Player WIEN 27,0,0,13 Q3 134.1 2004-2016 Apla. All rights reserved. Save & Co 201J Cengage Learning except as rated. An nares reserved.

Explanation / Answer

According to international fisher effect change in value of currency is due to difference nominal interest rates assuming real interest rates are same all over the world
Hence 2nd option is applicable.

According to fisher equation as given in previous question:
0.8734*(1.03/1+Rate US)=0.8297

Rate = 8.4250%

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