Question

In: Finance

The IFE suggests that the percentage change in the exchange rate over the investment horizon will...

The IFE suggests that the percentage change in the exchange rate over the investment horizon will equal the interest rate differential between the two countries. ef = ih-if (textbook section 8-2d.) Implying that if ih>if or interest in home country is greater than interest in foreign country, then the exchange rate should go up. This contradicts what we discussed in chapter 4 and 6. If interest rates go up in the home country , then the home currency should appreciate and the foreign currency should depreciate.

How would you reconcile the two contradicting predictions?

Solutions

Expert Solution

jeff jeffy answered 1 month ago
Next > < Previous

Related Solutions

The IFE suggests that the percentage change in the exchange rate over the investment horizon will...
The IFE suggests that the percentage change in the exchange rate over the investment horizon will equal the interest rate differential between the two countries. ef = ih-if (textbook section 8-2d.) Implying that if ih>if or interest in home country is greater than interest in foreign country, then the exchange rate should go up. This contradicts what we discussed in chapter 4 and 6. If interest rates go up in the home country , then the home currency should appreciate...
Write about Zimbabwe Exchange rate regime and describe the change of ZImbabwe exchange rate with figures...
Write about Zimbabwe Exchange rate regime and describe the change of ZImbabwe exchange rate with figures and tables? explain the causes for exchange rate change and give suggestions on ZImbabwe exchange rate regime if necessary?
The interest rate affects the investment patterns in the economy. A friend of yours suggests a...
The interest rate affects the investment patterns in the economy. A friend of yours suggests a get-rich-quick scheme: Borrow from the nation with the lower nominal interest rate, invest in the nation with the higher nominal interest rate, and profit from the interest-rate differential. Do you see any potential problems with this idea? Explain. What are the cons of the strategy? Consumer spending during holiday seasons affects the aggregate demand (AD) in the economy. AD drastically declines during serious recessions....
G11-2 Exchange Rate Effects on Your Firm Describe how a change in the exchange rate affected...
G11-2 Exchange Rate Effects on Your Firm Describe how a change in the exchange rate affected your firm. Explain what happened to your price and quantity. How can you profit from future shifts in the exchange rate? How do you predict future changes in the exchange rate?
You have $1,000 to invest over an investment horizon of three years. The bond market offers...
You have $1,000 to invest over an investment horizon of three years. The bond market offers various options. You can buy (i) a sequence of three one-year bonds; or (ii) a three-year bond; The current yield curve tells you that the one-year, two-year, and three-year yields to maturity are 3 percent, 4 percent, and 4.4 percent, respectively. You expect that one-year interest rates will be 4 percent next year and 5 percent the year after that. Assuming annual compounding, compute...
2. You have $1,000 to invest over an investment horizon of three years. The bond market...
2. You have $1,000 to invest over an investment horizon of three years. The bond market offers various options. You can buy (i) a sequence of three one-year bonds; (ii) a three-year bond; or (iii) a two-year bond followed by a one-year bond. The current yield curve tells you that the one-year, two-year, and three-year yields to maturity are 3.5 percent, 4.0 percent, and 4.5 percent respectively. You expect that one-year interest rates will be 4 percent next year and...
31) If the percentage change in the price of a good exceeds the percentage change in...
31) If the percentage change in the price of a good exceeds the percentage change in the quantity supplied, then the supply is A) elastic. B) inelastic. C) unit elastic. D) perfectly elastic. E) perfectly inelastic. 33) When the percentage change in the quantity supplied equals the percentage change in price, the supply is A) elastic. B) inelastic. C) unit elastic. D) perfectly elastic. E) perfectly inelastic. 34) When the percentage change in the quantity supplied is less than the...
Discussion Board Post: What’s the Implication of the IFE for forecasting exchange rates?
Discussion Board Post: What’s the Implication of the IFE for forecasting exchange rates?
Discuss IRP, the IFE, and international arbitrage opportunities with interest and currency exchange rates.
Discuss IRP, the IFE, and international arbitrage opportunities with interest and currency exchange rates.
What have been the percentage change in the value of Bitcoin expressed in U.S. dollars over...
What have been the percentage change in the value of Bitcoin expressed in U.S. dollars over the last 30 days? What has been the one-year change and three-year change in the value of Bitcoin? Do you detect a trend? Is Bitcoin money? Does Bitcoin fulfill the functions of money? If you conclude that Bitcoin is not money what is it? Explain.
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT