PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Question
Chapter 27, Problem 4PS
Summary Introduction
To determine: The countries which are expected to have lower 1-year interest rate than Country U.
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Students have asked these similar questions
Use the information below to answer the following questions.
Currency per U.S. $
1.2380
1.2353
Australia dollar
6-months forward
Japan Yen
6-months forward
U.K. Pound
6-months forward
100.3600
100.0200
.6789
.6784
Suppose interest rate parity holds, and the current six month risk-free rate in the United
States is 5 percent. Use the approximate interest rate parity equation to answer the
following questions.
a. What must the six-month risk-free rate be in Australia? (Enter your answer as a
percent rounded to 2 decimal places, e.g., 32.16.)
b. What must the six-month risk-free rate be in Japan? (Enter your answer as a percent
rounded to 2 decimal places, e.g., 32.16.)
a. Australian risk-free rate
b. Japanese risk-free rate
c. Great Britain risk-free rate
c. What must the six-month risk-free rate be in Great Britain? (Enter your answer as a
percent rounded to 2 decimal places, e.g., 32.16.)
%
%
%
Please use the data below, to answer the following question.
Interest rate in US (Rh):
Interest rate in Euro Zone (Rh):
The current spot rate for EUR (SO):
The expected spot rate for EUR 1
year later (S1):
What is the uncovered rate of return from the Euro Zone point of view (Ruf)?
4.00%
3.20%
7.81%
3.5%
7.5%
$1.25
$1.20
O 11.79 %.
A. Suppose the dollar interest rate and the
euro interest rate are the same and equal 2
percent per year. Suppose the expected
future $/€ exchange rate is $1.20 per 1 €.
Suppose now Euro interest rate decreases to 1
percent per year. Determine how the new
equilibrium $/€ exchange rate will change if
the US interest rate remains constant.
B. Indicate how the change in the Euro
interest rate will affect the equilibrium $/€
exchange rate and the expected return on
euro assets. Explain the changes on the
graph.
Chapter 27 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 27 - Exchange rates Look at Table 27.1. a. How many...Ch. 27 - Exchange rates Table 27.1 shows the 3-month...Ch. 27 - Prob. 3PSCh. 27 - Prob. 4PSCh. 27 - Prob. 5PSCh. 27 - Prob. 6PSCh. 27 - Prob. 8PSCh. 27 - Prob. 9PSCh. 27 - Prob. 10PSCh. 27 - Currency risk Companies may be affected by changes...
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- Let in and if represent the nominal 1-year interest rates for a home and foreign country, respectively. According to the international Fisher effect (IFE) theory, which of the following best represents the predicted change in the foreign currency ef? O ○ ef = ef = 1-in 1-i 1+if 1+i - - 1 1 ○ ef 1+in ○ ef = +1 1+i ○ ef = 1+in 1+if - 1arrow_forwardWhat current rate environment is the US currently in by historical standards? (LOW, HIGH, AVERAGE) What are the expectations for rates in the US over the next year? How will this impact businesses borrowing money (debt)? What do you observe in day-to-day life regarding current inflation?arrow_forwardD3 Suppose the 1-year domestic interest rate is 0.28, keeping in mind that means (100\times×0.28)%. Suppose also that the 1-year expected exchange rate is 59, and the current spot exchange rate is 50, both measured in domestic currency per foreign currency. What is the 1-year foreign interest rate according to uncovered interest parity?arrow_forward
- Integrating IRP and IFE Assume the following information is available for the United States and Europe: U.S. EUROPE Nominal interest rate 4% 6% Expected inflation 2% 5% Spot rate — $1.13 One-year forward rate — $1.10 Does IRP hold? According to PPP, what is the expected spot rate of the euro in one year? According to the IFE, what is the expected spot rate of the euro in one year? Reconcile your answers to parts (a) and (c).arrow_forwardSuppose that the Eurozone is the domestic country and the United States is the foreign country. The spot exchange rate quote is S=e:$ = $1.25. Suppose further that the expected annual U.S. inflation rate is 8.91 percent and the expected Eurozone annual inflation rate is 12.87 percent. Calculate the expected spot rate and the approximate expected spot rate one year awayarrow_forward
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