Suppose that EUR/USD is trading at 1.1700 in the spot market and the one-year forward EUR/USD exchange rate is 1.2000. Explain which currency has higher one-year interest rate.
Added by Marilyn W.
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According to the interest rate parity theory, the difference between the spot exchange rate and the forward exchange rate is related to the interest rates of the two currencies involved. Show more…
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Answer based on the following: Interest rate on U.S. assets = 5%, interest rate on European assets = 12%, the spot rate of exchange = 0.90 Euros/$, the one year forward rate of exchange = 0.95 EUROS/$. The dollar is expected to appreciate.
Adi S.
Danielle F.
'Suppose that the expected real interest rate in the United States is 3 percent per year while that in Europe is 5 percent per year: What do you expect to happen to the real dollar/euro exchange rate (number of USD per Euro) over the next year? Explain and justify your answer using the theories you have learned in chapter 16.'
Prashant B.
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