{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Homework 8

# Homework 8 - ECON 460 Homework 8(Final HW Due in class on 1...

This preview shows pages 1–2. Sign up to view the full content.

ECON 460 – Homework 8 (Final HW) Due in class on April 20, 2011 1. a. Draw a graph to show the CIP condition. In the graph, plot the following and indicate whether there will be capital inflow or outflow: (10 points) (i) I NY = 0.02; I Germany = 0.02; Spot rate: € 1 = \$1.35; Forward rate: € 1 = \$1.30. Assume transaction cost of 0.25% (ii) I NY = 0.02; I Germany = 0.03; Spot rate: € 1 = \$1.35; Forward rate: € 1 = \$1.33. Assume transaction cost of 0.25% (iii) I NY = 0.04; I Germany = 0.02; Spot rate: € 1 = \$1.35; Forward rate: € 1 = \$1.3635. Assume transaction cost of 0.25% b. What is the effect of each of the above on domestic interest rate, foreign interest rate, spot rate and forward rate? Use the money market graph and foreign exchange graph to explain this. (10 points) 2. Given the following exchange rates, how will arbitrageurs behave? Calculate profit/loss. a. € 1 = \$1.35 in New York € 1 = \$1.36 in Paris What will happen to the Euro in the two markets? Depreciate or appreciate? (5 points) b. € 1 = \$1.35 in Paris £ 1 = \$1.60 in New York € 1.10 = £ 1.00 in London How will arbitrageurs behave? (10 points) 3.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 2

Homework 8 - ECON 460 Homework 8(Final HW Due in class on 1...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online