If the nominal interest rates in the U.S. and Euro zone are 3% and 2%, respectively,...

If the nominal interest rates in the U.S. and Euro zone are 3% and 2%, respectively, and the inflation rate in the U.S. in the coming year is expected to be 7%. What would be the expected inflation rate in the Euro zone?

Expert Solution

jeff jeffy answered 2 years ago

2. Determinants of market interest rates Some characteristics of the determinants of nominal interest rates are...

2. Determinants of market interest rates Some characteristics of the determinants of nominal interest rates are listed as follows. Identify the components (determinants) and the symbols associated with each characteristic: Characteristic Component Symbol As interest rates rise, bond prices fall, and as interest rates fall, bond prices rise. Because interest rate changes are uncertain, this premium is added as a compensation for this uncertainty. This is the rate on a Treasury bill or a Treasury bond. ...

The U.S. nominal annual rate of interest is 3% and the European annual nominal rate of...

The U.S. nominal annual rate of interest is 3% and the European annual nominal rate of interest on the Euro is 2%. At the same time, the spot exchange rate is $1.20 per Euro and the real interest rate is 2% in both the U.S. and Europe. What is the one year forecast of the U.S. dollar (USD) per Euro spot exchange rate, assuming the international Fisher effect holds? Show work. What is the U.S. dollar (USD) per Euro one-year...

A computer software development company in the U.S. exports its software to the euro zone. The...

A computer software development company in the U.S. exports its software to the euro zone. The company’s European distributor asks and the company agrees to receive payments in euros (€). The distributor has just ordered a shipment that is priced in euros at today’s dollar equivalent of $28,150,000 for delivery and settlement in three months. The U.S.-based company is particularly worried about a high degree of uncertainty surrounding the euro exchange rate against the dollar. It decides to consider whether...

1. Assume that annual interest rates in the U.S. are 3 percent, while interest rates in...

1. Assume that annual interest rates in the U.S. are 3 percent, while interest rates in Japan are 6 percent. Assume that the current spot rate is ¥100/$. Suppose the U.S. risk-free interest rate has been steadily rising from 2% 3 years ago to 5% currently. The Euro interest rate has remained constant over the same time period at 6%, what should be happening to the Euro’s forward premium/discount? What is the impact of an appreciation of the USD on...

Critical Thinking: Most of the world has floating exchange rates, but the Euro Zone combined the...

Critical Thinking: Most of the world has floating exchange rates, but the Euro Zone combined the currencies of 17 countries to in effect, create a fixed exchange rate between them. China has a fixed exchange rate with the US dollar, and under values their exchange rate by 17% - 19%, thus giving them an unfair advantage in international exchange. Should the world governments get together and set up a common rule for currency exchange? Discuss.

The one year interest rates in Australia and US are 3% and 1%, respectively. The current...

The one year interest rates in Australia and US are 3% and 1%, respectively. The current spot rate is $0.75/AUD. (Show calculation and steps) a. What should the one year forward rate be (if IRP holds). b. If the forward rate is $0.70/AUD is there an arbitrage? If so, how can an arbitrageur incorporate a cashless (i.e. not use any of her current cash) arbitrage? Hint: She will need to borrow in the US or Australia at the current rates....

Assuming inflation rates in the U.S. and Switzerland are 5% and 3% respectively. Spot exchange rate...

Assuming inflation rates in the U.S. and Switzerland are 5% and 3% respectively. Spot exchange rate of Swiss francs is US$1.05. Purchasing Power Parity (PPP) and international Fisher effect (IFE) are held in this case. Required: (a) Calculate the expected percentage change of spot exchange rate of Swiss francs. (b) Calculate the U.S. interest rate if interest rate in Switzerland is 3.5%. (c) “If PPP is held, IFE is held too.” Explain whether this statement is correct.

7. Determinants of market interest rates Some characteristics of the determinants of nominal interest rates are...

7. Determinants of market interest rates Some characteristics of the determinants of nominal interest rates are listed as follows. Identify the components (determinants) and the symbols associated with each characteristic: Component: Real Risk-Free Rate, Maturity Risk Premium, Inflation Premium, Nominal Risk-Free Rate, Default Risk Premium, Liquidity Risk Premium Symbol: rRF, LP, DRP, IP, MRP, r* Characteristic Component Symbol This is the difference between the interest rate on a US Treasury bond and a corporate bond of the same profile—that is,...

The two-month interest rates in Switzerland and the United States are, respectively, 1% and 2% per...

The two-month interest rates in Switzerland and the United States are, respectively, 1% and 2% per annum with continuous compounding. The spot price of the Swiss franc is $1.0500. The futures price for a contract deliverable in two months is also $1.0500. What arbitrage opportunities does this create? What would be the risk-free profit made by the arbitrageur?

Thoroughly Discuss Interest Rates.(Nominal Interest rates,Loanable Funds theory,Movement of Interest rates over time, Determinants of interest...

Thoroughly Discuss Interest Rates.(Nominal Interest rates,Loanable Funds theory,Movement of Interest rates over time, Determinants of interest rates for Individual securities, term structure of interest rates,Time Value of Money and interest rates,Various Interest rate measures like Bond valuation, Equity Valuation,impact of interest rate on security values and maturity.Coupon rate and Duration security values.)

Question