Omni Advisors, an international pension fund manager, uses the concepts of purchasing power parity (PPP) and the InternationalFisher Effect (IFE) to forecast spot exchange rates. Omni gathers the financial information as follows:Base price levelCurrent U.S. price levelCurrent South African price levelBase rand spot exchange rateCurrent rand spot exchange rateExpected annual U.S. inflationExpected annual South African inflationExpected U.S. one-year interest rateExpected South African one-year interest rate100105111$ 0.189$ 0.172Required:Calculate the following exchange rates (ZAR and USD refer to the South African rand and U.S. dollar, respectively):X Answer is complete but not entirely correct.$$$7%5%a. The current ZAR spot rate in USD that would have been forecast by PPP.Note: Do not round intermediate calculations. Round your answer to 4 decimal places.ZAR spot rate under PPPExpected ZAR spot rateExpected ZAR under PPP10%8%b. Using the IFE, the expected ZAR spot rate in USD one year from now.Note: Do not round intermediate calculations. Round your answer to 4 decimal places.0.2076 x0.1642 X0.2328 Xc. Using PPP, the expected ZAR spot rate in USD four years from now.Note: Do not round intermediate calculations. Round your answer to 4 decimal places.

Spot exchange rate:The spot exchange rate denotes the immediate value at which one currency can be…

Omni Advisors, an international pension fund manager, uses the concepts of purchasing power parity (PPP) and the International Fisher Effect (IFE) to forecast spot exchange rates. Omni gathers the financial information as follows: Base price level. Current U.S. price level Current South African price level Base rand spot exchange rate Current rand spot exchange rate Expected annual U.S. inflation Expected annual South African inflation. Expected U.S. one-year interest rate Expected South African one-year interest rate Required: 100 105 111 $ 0.189 $ 0.172 78 5% 10% 8%

Omni Advisors, an international pension fund manager, uses the concepts of purchasing power parity (PPP) and the International Fisher Effect (IFE) to forecast spot exchange rates. Omni gathers the financial information as follows: Base price level. Current U.S. price level Current South African price level Base rand spot exchange rate Current rand spot exchange rate Expected annual U.S. inflation Expected annual South African inflation. Expected U.S. one-year interest rate Expected South African one-year interest rate Required: 100 105 111 $ 0.189 $ 0.172 78 5% 10% 8%

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter9: Forecasting Exchange Rates

Section: Chapter Questions

Problem 25QA

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Omni Advisors, an international pension fund manager, uses the concepts of purchasing power parity (PPP) and the International Fisher Effect (IFE) to forecast spot exchange rates. Omni gathers the financial information as follows: Base price level Current U.S. price level Current South African price level Base rand spot exchange rate Current rand spot exchange rate Expected annual U.S. inflation Expected annual South African inflation ZAR spot rate under PPP 100 105 111 Expected U.S. one-year interest rate Expected South African one-year interest rate Calculate the following exchange rates (ZAR and USD refer to the South African rand and U.S. dollar, respectively): a. The current ZAR spot rate in USD that would have been forecast by PPP. (Do not round intermediate calculations. Round your answer to 4 decimal places.) Expected ZAR spot rate $ 0.186 $ 0.169 7% 5% 10% 8% b. Using the IFE, the expected ZAR spot rate in USD one year from now. (Do not round intermediate calculations. Round…
Omni Advisors, an international pension fund manager, uses the concepts of purchasing power parity (PPP) and the International Fisher Effect (IFE) to forecast spot exchange rates. Omni gathers the financial information as follows: Base price level Current U.S. price level Current South African price level Base rand spot exchange rate Current rand spot exchange rate Expected annual U.S. inflation Expected annual South African inflation Expected U.S. one-year interest rate Expected South African one-year interest rate 100 105 111 $ 0.190 $0.173 7% 5% 10% 8% Required: Calculate the following exchange rates (ZAR and USD refer to the South African rand and U.S. dollar, respectively): a. The current ZAR spot rate in USD that would have been forecast by PPP. Note: Do not round intermediate calculations. Round your answer to 4 decimal places. b. Using the IFE, the expected ZAR spot rate in USD one year from now. Note: Do not round intermediate calculations. Round your answer to 4 decimal…
Omni Advisors, an international pension fund manager, uses the concepts of purchasing power parity (PPP) and the International Fisher Effect (IFE) to forecast spot exchange rates. Omni gathers the financial information as follows: Base price level Current U.S. price level Current South African price level Base rand spot exchange rate Current rand spot exchange rate Expected annual U.S. inflation Expected annual South African inflation. Expected U.S. one-year interest rate Expected South African one-year interest rate ZAR spot rate under PPP 100 105 111 $0.190 $0.173 Calculate the following exchange rates (ZAR and USD refer to the South African rand and U.S. dollar, respectively): a. The current ZAR spot rate in USD that would have been forecast by PPP. (Do not round intermediate calculations. Round your answer to 4 decimal places.) Expected ZAR spot rate 10% 8% 138 11% b. Using the IFE, the expected ZAR spot rate in USD one year from now. (Do not round intermediate calculations. Round…
An international pension fund manager, uses the concepts of purchasing power parity (PPP) and the International Fisher Effect (IFE) to forecast spot exchange rates. Omni gathers the financial information as follows: Base price level 100 Current U.S. price level 105 Current South African price level 111 Base rand spot exchange rate $ 0.194 Current rand spot exchange rate $ 0.177 Expected annual U.S. inflation 7 % Expected annual South African inflation 5 % Expected U.S. one-year interest rate 10 % Expected South African one-year interest rate 8 % Calculate the following exchange rates (ZAR and USD refer to the South African rand and U.S. dollar, respectively): a. The current ZAR spot rate in USD that would have been forecast by PPP. (Do not round intermediate calculations. Round your answer to 4 decimal places.) b. Using the IFE, the expected ZAR spot rate in USD one year from now. (Do not round intermediate calculations.…
Omni Advisors, an international pension fund manager, uses the concepts of purchasing power parity (PPP) and the International Fisher Effect (IFE) to forecast spot exchange rates. Omni gathers the financial information as follows: Base price level 100 Current U.S. price level 105 Current South African price level 111 Base rand spot exchange rate $ 0.192 Current rand spot exchange rate $ 0.175 Expected annual U.S. inflation 7% Expected annual South African inflation 5% Expected U.S. one-year interest rate 10% Expected South African one-year interest rate 8% Required: Calculate the following exchange rates (ZAR and USD refer to the South African rand and U.S. dollar, respectively): The current ZAR spot rate in USD that would have been forecast by PPP. Note: Do not round intermediate calculations. Round your answer to 4 decimal places. Using the IFE, the expected ZAR spot rate in USD one year from now. Note: Do not round intermediate calculations. Round your…
Allium Advisors, an international fund manager, plans to sell equities denominated in British pound (GBP) and purchase an equivalent amount of equities denominated in Egyptian Pound (EGP). The following are the current exchange rates between the EGP, GBP and USD. Maturity Spot 30-day 90-day EGP/USD 13.2913/68 35/65 52/48 GBP/USD 0.7936/79 53/33 22/40 Calculate: V. The 90-day annualized premium or discount GBP in EGP
Suppose the following exchange rate quotations are available: Citibank quotes U.S. dollars per Euro: $1.2223/€Barclays Bank quotes U.S. dollars per pound sterling: $1.8410/£ Dresdner Bank quotes Euros per pound sterling: €1.5100/£ You are a market trader with $1,000,000. Will you be able to make an arbitrage profit using these quotes? If yes, why? What will be the profit? Show your calculations.
Explain the implications of interest rate parity and purchasing power for U.S. dollar exchange rate against the Euro. Then, evaluate the usefulness of relative PPP in predicting movements in foreign exchange rates on (i) the short-term basis and (ii) the long terms basis.
Select all statements below that correctly describe currency spot markets: The most heavily traded currency in spot markets is the United States dollar. The spot market includes currency futures, forwards, and options. The spot market is for immediate exchange of currencies, but the value/settlement date may take up to two days. The spot market has the same trading hours as the London Stock Exchange. The spot market is centralized in New York city. The retail spot market includes large corporations, local banks, and individuals.
The following graph depicts the foreign exchange market for the euro. The demand for euros is represented by the blue line, while the supply of euros is represented by the orange line. Suppose that the federal reserve of the United States wishes to lower the value of the euro relative to the dollar. Shift either the supply curve or the demand curve to reflect the monetary policy that the Fed is likely to enact if it uses direct intervention. VALUE OF EURO (Dollars per euro) QUANTITY OF EUROS S D D S
The following graph plots the percentage change in the spot rate for a foreign currency along the horizontal axis, while measuring the interest rate differential (between a home country and a foreign country) along the vertical axis. in refers to the interest rate in the home country, while if refers to the interest rate in a foreign country. On the following graph, use the blue line (circle symbol) to plot the combinations of percentage change of the foreign currency spot rate and interest rate differential that are consistent with the international Fisher effect (IFE) theory. ih - if (%) 7 6 5 IFE Line 4 3 2 1 0 -1 -2 -3 -4 4 5 6 -5 -7 -7 -6 -5 -4 -3 -2 -1 1 2 3 4 5 67 Change in Foreign Currency Spot Rate (%) ?
Which of the following best describes the terms 'long forward position' and 'short forward position' in foreign exchange trading? A short forward position is holding a currency for a short duration, while a long forward position is holding it for a longer period. A short forward position means you have agreed to sell a currency in the future, while a long forward position means you have agreed to buy it in the future. A long forward position is when you expect the currency's future spot rate to decrease, and a short forward position is when you expect it to increase. A long forward position means you have agreed to sell a currency in the future, and a short forward position means you have agreed to buy it in the future.