Exercise Session 2 - Exercise Session 2 International...

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Exercise Session 2 International Financial Management I Exercise 1 From 1982 to 1988, Peru and Chile stand out as countries whose interest rates are not consistent with their inflation experience. Specifically, Peru's inflation and interest rates averaged about 125% and 8%, respectively, over this period, whereas Chile's inflation and interest rates averaged about 22% and 38%, respectively. a. How would you characterize the real interest rates of Peru and Chile (e.g., close to zero, highly positive, highly negative)? Exercise 2 Chase Econometrics has just published projected inflation rates for the United States and Germany for the next five years. U.S. inflation is expected to be 10 percent per year, and German inflation is expected to be 4 percent per year. a. If the current exchange rate is $0.95/€, what should the exchange rates for the next five years be? b. Suppose that U.S. inflation over the next five years turns out to average 3.2%, German inflation averages 1.5%, and the exchange rate in five years is $0.99/€. What has happened to the real
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