Assume the market thinks there is a 40% probability of devaluation of 5% within the next month. How much must the annual interest rate increase to defend the fixed exchange rate? What if the probability of 5% devaluation within the next month increases to 80%?
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Assume the market thinks there is a 40% probability of devaluation of 5% within the next month. How much must the annual interest rate increase to defend the fixed exchange rate? What if the probability of 5% devaluation within the next month increases to 80%?
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- Suppose that the current interest rate in the US is 0.89%. If the NIRP predicts that the exchange rate between Madagascar's Ariary and the US dollar will jump from 3,750 Ariary/Dollar to 4,244 Ariary/Dollar, what is the current interest rate in Madagascar? Round your answer to two decimal points and omit any units (e.g., 1.23 NOT 1.23%).If the exchange rate at time t is Et = €1/$. You invest $1 in an euro asset at t, which has an interest of 8%. When the asset expires at t+1, you get paid €_ _(x.xx round to two decimal places). If dollar appreciates by 2 % against euro, that is, Et+1 = € /$(x.xx round to two decimal places), then you can buy back $ (x.xx round UP to two decimal places). Blank # 1 Blank # 2 Blank # 3In mid-2006, a British pound sterling (the monetary unit in the United Kingdom) was worth 1.4 euros (the monetary unit in the European Union). If a U.S. dollar bought 0.55 pound sterling in 2006, what was the exchange rate between the U.S. dollar and the euro?
- What is an exchange rate? Why would a government want to maintain a fixed exchange rate? If the U.S. wanted to maintain a fixed exchange rate between the Euro and the Dollar, how would it do so?The UK pound is trading at 1.54 Canadian dollars per UK pound. There is purchasing power parity at this exchange rate .The interest rate in Canada is 2 percent a year and interest rate in The United Is 4% a year. a) Calculate the Canadian interest rate differential. b) What is the UK pound expected to be worth in terms of Canadian dollars one year from now. c) Which country more likely has a lower inflation rate ? How can you tell?Suppose the U.S. dollar interest rate is 3%, while the interest rate in the United Kingdom is 6%. Your friend thinks he can convert his dollars, invest in the United Kingdom and convert his pounds back into dollars at the end of a year, allowing him to make a higher return than investing in dollars. Assuming uncovered interest parity (UIP) holds, explain why he is incorrect.
- It costs 100 GBP to buy a certain basket of goods in the UK. It costs 200 USD to buy the same basket in the US. 1 year deposit rates are 10% in both countries. Everyone expects these numbers to remain the same indefinitely. What is the current exchange rate between USD and GBP implied by purchasing power parity? What is the current exchange rate between USD and GBP implied by the overshooting model? Today, the Bank of England announces that it is going to lower the short-term interest rate to 5% in May 2024 and to return it to 10% in May 2025. It also says that the price level will go up and, eventually, it will cost 150 GBP to buy the same basket of goods in the UK. The price adjustment will be completed by May 2026. What is the current exchange rate between USD and GBP implied by the overshooting model? Under the circumstance described in (3), what will be the exchange rate between USD and GBP in May 2024?If the nominal exchange rate e is foreign currency per dollar, the domestic price is P, and the foreign price is P*, then the real exchange rate is defined as e(P/P*). Select one: True FalseOn 5 November, 2021 the yield on a one-year Colombian government bond is 3.24%, and the Colombian exchange rate is 3,872.50 COP/USD (i.e., 3,872.5 Colombian pesos per US dollar). a) If the uncovered interest parity condition holds, do financial market participants expect the Colombian peso to appreciate or depreciate (vis-à-vis the US dollar) over the next year? What exchange rate are financial market participants expecting for November 5, 2022?
- Suppose that the current EUR/GBP exchange rate is £0.86 per euro. The current 6-month interest rates are: GBP 4%, EUR 6%. There are three 6-month forward contracts available, with the following exchange rates: Contract A B C EUR/GBP 0.86 0.85 0.90 You expect to receive an inheritance of €50,000 in six months, and you expect the EUR/GBP exchange rate to remain at £0.86 per euro until then. Would you enter in any of the available contracts today? If so and assuming your expectation about the future exchange rate is correct, how much profit/loss would you make Given the current EUR/GBP exchange rate and the available forward contracts, can you identify any arbitrage opportunities? If yes, provide two examples. In each case, calculate arbitrage profit and explain how this profit can be earned.Suppose that the current EUR/GBP exchange rate is £0.86 per euro. The current 6-month interest rates are: GBP 4%, EUR 6%. There are three 6-month forward contracts available, with the following exchange rates: Contract A B C EUR/GBP 0.86 0.85 0.90 You expect to receive an inheritance of €50,000 in six months, and you expect the EUR/GBP exchange rate to remain at £0.86 per euro until then. Would you enter in any of the available contracts today? If so and assuming your expectation about the future exchange rate is correct, how much profit/loss would you make?Accel Co. produces a standard tennis racket in the Netherlands and sells it online to consumers in the United States. This racket competes with a tennis racket produced by Malibu Co. in the United States, which is of similar quality and is priced at about $140. Accel has set the price of its tennis racket at 100 euros. Assuming that the euro's exchange rate (during the sales month in question) was $1.60, then the price of Accel's racket to U.S. consumers is $_________ (enter a whole number). Because U.S. consumers could buy a Malibu racket for only $140, Accel only sold about 1,000 rackets to U.S. consumers in that month. Since then, however, the euro's value has weakened; this month, the euro's exchange rate is only $1.20. U.S. consumers can now purchase the Accel tennis racket for $_________(enter a whole number), which is less than that charged for the U.S. Malibu racket. In this month, Accel sold 5,000 rackets. The U.S. demand for this tennis racket is price-elastic (sensitive to…
