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f55 class work ch04 sol

# f55 class work ch04 sol - SOLUTIONS IN CLASS ASSIGNMENT 1...

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SOLUTIONS: IN CLASS ASSIGNMENT # 1: PPP / Fisher Effect Real rate of return = 3%, Current spot rate for BP = \$2.00 Consumer Price Index USA UK Year 2001 100 200 Year 2002 105 216 Inflation Rate (105-100)/100 = 5% (216 - 200)/200 =8% Interest Rate (Approximate) 3+ 5 = 8% 3 + 8 = 11% Interest Rate (Exact) (1.03)*(1.05)-1 = 8.15% (1.03)*(1.08)-1 = 11.24% 1. Find the expected percentage change in spot rate for BP, according to PPP: (1.0815) / (1.1124) -1 = - 2.78% 2. Find the expected spot rate for BP one year latter, according to PPP: 2.00 (1-0.0278) = \$ 1.944 3. If the spot rate for BP one year latter is \$1.98, then the: (i) BP has appreciated in “real”terms and \$ has depreciated in “real”terms Because the actual SR (1.98) > the PPP-SR (1.944) 4. If the spot rate for BP one year latter is \$1.93, then the: (i) BP has depreciated in “real”terms and \$ has appreciated in “real”terms Because the actual SR (1.93) < the PPP- SR (1.944) 5. Use the Fisher method to estimate both the approximate and the exact interest rates in US and UK: See the last two rows of the table above .

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f55 class work ch04 sol - SOLUTIONS IN CLASS ASSIGNMENT 1...

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