Assume that the U.S. interest rate is 2%, the European interest rate is 7%, and the future expected exchange rate in one year is $1.224. If the spot rate is $1.26, then the expected dollar return on euro deposits is: a. 4.1%. b. 8.9%. c. 0.5%. d. -0.05%. The answer is C please explain how
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- In the bad scenario, the euro can appreciate against the dollar by -15%. The probability of that is 50%. In the good scenario, it will grow 5%. The interest rate is 10% in the EU. a) Find the dollar return of the euro deposit in the bad scenario. That is, if you invest one today dollar in Europe, how many future dollars will you get a year from now? Answer: 0.935 b) In the good scenario, an investment of one euro in Europe returns 1.155 future dollars. Find the expected return on a European deposit. Answer: 1.045 c) Profit is a convex function of the return. The profit of the bad case is -0.067, of the good case 0.077, and of the expected return 0.044. Graph the profit function that would map all the three returns into profits. Answer: (d) Find the expected profit. Draw a graph of the profit function and show how the expected profit is found. Answer:1.005 or .005 e) The certainty equivalent of your answer to (d) is 1.005. Find the forward premium. Show calculation. Answer:…If the exchange rate at time t is Et = €1/$. You invest $1 in an euro asset at t, which has an interest of 8%. When the asset expires at t+1, you get paid €_ _(x.xx round to two decimal places). If dollar appreciates by 2 % against euro, that is, Et+1 = € /$(x.xx round to two decimal places), then you can buy back $ (x.xx round UP to two decimal places). Blank # 1 Blank # 2 Blank # 3Suppose that the interest rate is 7 percent on euro-denominated assets of a one year maturity and 5 percent on dollar-denominated assets of a one-year maturity, and the current spot exchange rate for the euro in terms of dollars is $1.50/€. If the dollar is expected to appreciate at a 4 percent rate, what is the rate of return that a French investor can expect to earn on a dollar-denominated assets? 3% 1% 5% 11%
- Suppose the interest rate is 7% on euro-denominated assets of a one year maturity and 5 percent on a dollar-denominated assets of a one-year maturity, and the current spot exchange rate for the euros in terms of the dollars is $1.50/€ . If the dollar is expected to appreciate at 4 percent rate, what is the rate of return that a French investor can expect to earn on a dollar-denominated assets? 3% 1% 5% 11%For the past several years, the annual rate of inflation in Turkey has been above 10%, but only around 1 % in the Eurozone. According to the Purchasing Power Parity theory, what can we say about the TL/ Euro exchange rate? a.The Turkish Lira would appreciate against the Euro. b.The Turkish Lira would depreciate against the Euro. c.The Turkish lira would maintain a constant exchange rate against the Euro.1. You have an accounts payable to a German exporter for 100 Porsche Cayenne SUVs. The seller offers a 2 percent discount for payment within 10 days and full payment due in 30 days (2/10 net 30). Today the exchange rate is $1.40 per Euro. You notice that the 30 day forward rate for the $/Euro is $1.38…..what should you do? You owe 70,000 Euros for each of the cars (before any discounts). [show your work!] 2. You are changing planes in London for a flight to Paris where you will connect with your flight to Capetown. You are picking up reading material for the flight and are looking at the prices listed on the Economist magazine which conveniently lists prices in several different global currencies. You note that the price in Pounds is 2.40 pounds and the price in Euros is 2 Euros. The exchange rate for the dollar (your credit card was issued in the USA) is $1.59/pound and $1.3837/euro. Should you buy reading materials now or wait until you’re in Paris? 3. You notice that the…
- If a Japanese car costs 500,000 yen, a similar American car costs $10,000, and a dollar can buy 100 yen, what are the normal and real exchange rate?The Big Mac index is used as a rough measure of purchasing power parity across countries. The Economist magazine recently included the Vietnamese dong in its calculation of the Big Mac index. A Big Mac costs $5.06 in the United States but only 60,368 dong or $2.66 in Vietnam (at the current exchange rate). What does this information suggest about the value of the real exchange rate of the U.S. dollar relative to the Vietnamese dong (treating the United States as the domestic economy, so the nominal exchange rate is expressed as dong per dollar)? Is the real exchange rate likely to be greater than or less than 1?You own a local company. In the past year, you successfully expanded your sales market into Europe, and you now have profits and cash denominated in euros. You want to convert the euros to your home country currency to repatriate the profits and pay taxes. You are a. not required to convert the euros to the home currency to pay taxes. b. a demander of the euro in the foreign exchange market. c. a supplier of your home country's currency in the foreign exchange market. d. a demander of your home country's currency in the foreign exchange market.
- 11. Suppose the interest rate in $- denominated deposits is P = 0.04, the interest rate on £-denominated deposits is :0.03, and the current exchange rate (e = #$/£1) is e = 2.0. Then if the interest- parity condition holds, we could say that the expected future exchange rate, eexp, is Group of answer choices 2.1. none of the other options. 2.02. 1.98. 1.8.If a "Big Mac costs $4.00 in the United States and 200 yen in Japan, then the implied "purchasing-power-parity" exchange rate using the "Big Mac" is __________. If the actual exchange rate in the market is 120 yen = $1, then an economist would say that the actual Japanese yen is __________ in comparison with its "purchasing-power-parity" rate.1. The principal function of the foreign exchange market is the transfer of funds, thus purchasing power, from one nation and currency to another. 2. If it takes 116.57 yen to buy one dollar, it takes $.0085785 to buy one yen. 3. Purchasing-power parity theory postulates that the change in the exchange rate between two currencies is proportional to the change in the ratio in the two countries' general price levels. 4. The price-specie-flow adjustment mechanism operates by the deficit nation losing gold and experiencing a reduction in its money supply. 5. Monetary policy is very effective under a fixed exchange rate policy. True or Falae
