Question

Question 1A

Which of the following is NOT true regarding IRP, PPP, IFE and FEP?

Question options:

	FEP states that any forward premium or discount is equal to the change in the exchange rate.
	IFE suggests that a currency's spot rate will change according to interest rate differentials.
	IRP suggests that a currency's spot rate will change according to interest rate differentials.
	PPP suggests that a currency's spot rate will change according to inflation rate differentials.

Question 1B

According to the international Fisher effect, if Cambodia has a much lower nominal rate than other countries, its inflation rate will likely be ____ than other countries, and its currency will ____.

Question options:

	higher; weaken
	lower; weaken
	lower; strengthen
	higher; strengthen

Question 1C

Assume that the U.S. and Chile nominal interest rates are equal. Then, the U.S. nominal interest rate increases while the Chilean nominal interest rate remains stable. According to the International Fisher effect, this implies expectations of ____ than before, and that the Chilean peso should ____ against the dollar.

Question options:

	lower U.S. inflation; depreciate
	higher U.S. inflation; appreciate
	lower U.S. inflation; appreciate
	higher U.S. inflation; depreciate

Question 1D

Which of the following theories suggests that the percentage difference between the forward rate and the spot rate depends on the interest rate differential between two countries?

Question options:

	purchasing power parity (PPP)
	international Fisher effect (IFE)
	interest rate parity (IRP)
	forward expectation parity (FEP)

Question 2A

Question options:Which of the following is true?

	If the IFE theory holds, it means that covered interest arbitrage is not feasible.
	Interest rate parity can only hold if purchasing power parity holds.
	If interest rate parity holds, then the international Fisher effect must hold.
	None of the above.

Question 2B

If the spot rate of the euro in one year is $1.02, what is Joann’s percentage return from her strategy?Joann Stark does not believe that the international Fisher effect (IFE) holds. Current one-year interest rates in Europe are 20 percent, while one-year interest rates in the U.S. are 5 percent. Joann converts $100,000 to euros and invests them in France. One year later, she converts the euros back to dollars. The current spot rate of the euro is $1.20.

Question options:

	2.00%
	2.45%
	102.00%
	14.18%

Question 2C 1. Conver $100,000 to euros at the current spot rate of euro (given in the problem). 2. Invest euro converted for one year to earn one-year interest rates in Europe. 3. Convert the amount of euros after one-year investment back to $ using the spot rate one year later (given in the problem). 4. Yield (or return) = (the amount of USD from step 3 - $100,000)/$100,000.

Question 2D

Continued from above, what must the spot rate of the euro be in one year for Joann's strategy to be successful?

Question options:

	As long as the spot rate is below $1.02 per euro, Joann’s strategy can be successful.
	As long as the spot rate is below $1.05 per euro, Joann’s strategy can be successful.
	As long as the spot rate is above $1.02 per euro, Joann’s strategy can be successful.
	As long as the spot rate is above $1.05 per euro, Joann’s strategy can be successful.

Question 3A Future spot exchange rate by IFE is: S(t)×1+ih1+if.{"version":"1.1","math":"S(t) \times \frac{1+i_h}{1+i_f}."}

Question 3B

Given a home country and a foreign country, international Fisher effect (IFE) suggests that:

Question options:

	a home currency will depreciate if the current foreign interest rate exceeds the current home interest rate.
	a home currency will appreciate if the current foreign inflation rate exceeds the current home inflation rate.
	a home currency will depreciate if the current foreign inflation rate exceeds the current home inflation rate.
	a home currency will appreciate if the current foreign interest rate exceeds the current home interest rate.

Question 3C

Assume that the U.S. inflation rate rate is higher than the New Zealand inflation rate. This will cause U.S. consumers to ____ their imports from New Zealand and New Zealand consumers to ____ their imports from the U.S. According to purchasing power parity (PPP), this will result in a(n) ____ of the New Zealand dollar (NZ$).

Question options:

	increase; increase; appreciation
	reduce; increase; appreciation
	increase; reduce; appreciation
	reduce; increase; depreciation

Answer 1

1a) Of all the options, option B is false, since the International Fischer Effect suggests that the interest rate differential is a factor of the inflation differential between the countries. Answer (B)

1b) Since the IFE suggests that the interest rate differentials is a factor of the inflation differentials, if the interest rate in Cambodia is lower than that of the other countries, the inflation levels will also be lower. Also, since the interest rates are lower, the value of the currency would appreciate. This is because the investment in the other countries is more attractive than in Cambodia. Thus the outside demand for the currency would reduce but the supply of the currency would increase since investment outside is more attractive. Hence the currency value is expected to appreciate. Answer (C)

1c) Since the nominal interest rate in US increases and that of Chile would remain the same, the inflation in US is expected to increase with reference to Chile as per the International Fischer Effect. To be more specific, since there is an increase in the interest rate in US, the investors in US will reduce their demand for the local currency of Chile and since investment in US is more attractive and the investors in Chile with excess cash would supply more Local currency to US in exchange of USD. Since there is an inward shift in the demand of the local currency and an away shift in the supply, the exchange rates tend to move into the higher side.Hence, the currency of Chile is expected to appreciate.

1d) Interest rate parity suggest that the difference between the spot rate and the forward rate is a factor of interest rate differentials between the two countries. Hence the answer is (C)