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# Quick%20Quiz%206%21 - (IP(1 i \$ ee =(1 i € e(1 0.05 ee...

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© Hadi Salehi Esfahani Quick Quiz 6! Suppose the interest parity and covered interest parity conditions both hold and we know: e = 1.00€/\$. i \$ = 0.05 i € = 0.03 1. What is the expected spot rate of exchange between the euro and the dollar a year from now? 2. What is the forward rate of exchange between the euro and the dollar for transactions a year from now? 3. What will happen to the current spot rate for the dollar if the expected exchange rate remains the same, while the Fed cuts the dollar interest rate to i \$ = 0.04?

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© Hadi Salehi Esfahani Solution to Quick Quiz 6: Suppose the interest parity and covered interest parity conditions both hold and we know: e = 1.00€/\$. i \$ = 0.05 i € = 0.03 1. What is the expected spot rate of exchange between the euro and the dollar a year from now?
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Unformatted text preview: (IP) (1 + i \$) ee = (1+ i €) e (1+ 0.05) ee = (1 + 0.03)(1.00) ee = 1.03/1.05 = 0.981€/\$. 3. What is the forward rate of exchange between the euro and the dollar for transactions a year from now? (CIP) (1 + i \$) ef = (1+ i €) e (1+ 0.05) ef = (1 + 0.03)(1.00) ef = 1.03/1.05 = 0.981€/\$. © Hadi Salehi Esfahani Solution to Quick Quiz 6: • Suppose the interest parity and covered interest parity conditions both hold and we know: • e = 1.00€/\$. • i \$ = 0.05 • i € = 0.03 3. What will happen to the current spot rate for the dollar if the expected exchange rate remains the same, while the Fed cuts interest rate is cut to i \$ = 0.04? (IP) (1 + i \$) ee = (1+ i €) e (1+ 0.04)(0.981) = (1 + 0.03) e e = 0.99€/\$....
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## This note was uploaded on 01/27/2012 for the course ECON 509 taught by Professor Villamil during the Fall '08 term at University of Illinois, Urbana Champaign.

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Quick%20Quiz%206%21 - (IP(1 i \$ ee =(1 i € e(1 0.05 ee...

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