Question

In the table below, exchange rate is defined as US dollars per Euro, E$/€. Given the information below, using UIP (in approximate form), fill in the blanks marked with letters. Round your answers to 3 decimals. Interest Rate on Dollar Deposit (annual) Interest Rate on Euro Deposit (annual) Spot Exchange Rate, E$/€ (today) Expected Future Exchange Rate, Ee$/€ (in one year) Expected Rate of Change in Exchange Rate (Ee$/€-E$/€)/E$/€ Expected Dollar Return on Euro Deposit (annual) Investors Prefer 0.025 (2.5%) 0.005 (0.5%) 1.10 1.326 0.205 (20.5%) 0.21 A 0.025 0.005 (0.5%) B 1.326 0.105 C D 0.025 0.005 E 1.326 F G Indifferent 0.025 0.005 1.4 1.326 H I J

Answer 1

Investors prefer =0.025*2.5/100=0.000625 units

Euro deposit =0.005*.5/100=0.0025%

Investors preference =0.5*0.005/100=0.000025 units

Expected rate of change =1.326*0.025/100=0.000315

Total current values in the deposit=0.003465*100=3465 units

An exchange rate is the value of one nation's currency versus the currency of another nation or economic zone. For example, how many U.S. dollars does it take to buy one euro? As of Dec. 13, 2019, the exchange rate is 1.10, meaning it takes $1.10 to buy €1

Types of echange rate are

Restricted Currencies

Some countries have restricted currencies, limiting their exchange to within the countries' borders. Also, a restricted currency can have its value set by the government.

Currency Peg

Sometimes a country will peg its currency to that of another nation. For instance, the Hong Kong dollar is pegged to the U.S. dollar in a range of 7.75 to 7.85.2 This means the value of the Hong Kong dollar to the U.S. dollar will remain within this range.

Onshore Vs. Offshore

Exchange rates can also be different for the same country. In some cases, there is an onshore rate and an offshore rate. Generally, a more favorable exchange rate can often be found within a country’s border versus outside its borders. China is one major example of a country that has this rate structure. Additionally, China's yuan is a currency that is controlled by the government. Every day, the Chinese government sets a midpoint value for the currency, allowing the yuan to trade in a band of 2% from the midpoint.3



Spot vs. Forward

Exchange rates can have what is called a spot rate, or cash value, which is the current market value. Alternatively, an exchange rate may have a forward value, which is based on expectations for the currency to rise or fall versus its spot price. Forward rate values may fluctuate due to changes in expectations for future interest rates in one country versus another. For example, let's say that traders have the view that the eurozone will ease monetary policy versus the U.S. In this case, traders could buy the dollar versus the euro, resulting in the value of the euro falling.

Quotation

Typically, an exchange rate is quoted using an acronym for the national currency it represents. For example, the acronym USD represents the U.S. dollar, while EUR represents the euro. To quote the currency pair for the dollar and the euro, it would be EUR/USD. In this case, the quotation is euro to dollar, and translates to 1 euro trading for the equivalent of $1.13 if the exchange rate is 1.13. In the case of the Japanese yen, it's USD/JPY, or dollar to yen. An exchange rate of 100 would mean that 1 dollar equals 100 yen.