Problem set One2010

Problem set One2010 - Economics 328 Professor Devereux Fall...

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Economics 328 Professor Devereux Fall 2009 Problem Set one Interest Rates Textbook: Chapter 2: questions 1, 2, 4, 5, 6 and 7. 1. Suppose that the forward rate for the dollar versus pound is 1.05 (that is the price of a pound one year in the future). The current spot rate is 1.0. a. What is the forward premium on dollars? Does the market expect the dollar to appreciate or depreciate? Explain b. Suppose interest rates in England are 0.01 what are interest rates in the US. Explain how your reach your answer. c. Following on from b. suppose that US interest rates are actually 0.03. How would you explain the difference with your answer in b? 2. The interest rate on one-year deposits for the US is seven percent. The spot exchange rate between the English pound and the US dollars is 1.50. In other words, it requires 1.50 dollars to buy one pound. The one-year forward rate is 1.53. a. What does the market expect to happen to the US exchange rate relative to the pound sterling over the next year? b.
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This note was uploaded on 03/22/2010 for the course ECON 328 taught by Professor Johndevereux during the Fall '08 term at CUNY Queens.

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Problem set One2010 - Economics 328 Professor Devereux Fall...

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