Purchasing power parity ppp theory states that the

16. Purchasing Power parity (PPP_ theory states that:
17. As of today, the spot exchange rate is €1.00=$1.25 and the rates of inflation expected to prevail for
the next year in the U.S. is 2% and 3% in the euro zone. What is the one-year forward rate that should
prevail?
18. If the annual inflation rate is 5.5 percent in the United States and 4% in the U.K., and the dollar
depreciated against the pound by 3%, then the real exchange rate, assuming that PPP initially held, is
19. A currency dealer has good credit and can borrow either $1,000,000 or €800,000 for one year. The
one-year inflation rate in the U.S. is 2%, and in the euro zone is 6%. The one-year forward exchange rate
is $1.20=€1.00; what must the spot rate be to eliminate arbitrage opportunities?
20. The international fisher Effect (IFE) suggest that
-the nominal interest rate differential reflects the expected change in the exchange rate.
21. yesterday you entered into a futures contract to buy €62500 at $1.50/€. Your initial margin was
$3750 (=0.04’ €62500 ‘ $1.50/€=4% of the contract value in dollars). Your maintenance margin is $2000
(meaning that your broker leaves you alone until your account balance falls to $2000). At what settle
price (use 4 decimal places) do you get a margin call?