Purchasing Power parity PPP theory states that The exchange rate between

# Purchasing power parity ppp theory states that the

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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?

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