3. The international Fisher effect (IFE) The international Fisher effect (IFE) s

Question

3. The international Fisher effect (IFE) 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, jh is the expected nominal interest rate in the home country, if is the expected nominal interest rate in the foreign country, TTh is the expected inflation rate in the home country, and TTr 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)0.9111 CHF/USD Expected yield on one-year Swiss government bond Expected yield on one-year U.S. Treasury Bill 0.9590 CHF/USD 2.00%

Explanation / Answer

E = ih - if is the correct representation of International Fisher Effect

Based on IFE

Future / Spot = (1 + CHF rate) / (1 + USD rate)

=> 0.9111 / 0.9590 = (1 + 2%) / (1 + USD rate)

=> USD rate = 7.36% is the US treasury bill

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