Question

B. 1) Countries Mali and South Africa have their interest rates to be 6% and 12 %, respectively. If their currencies trade according to 50 CFA francs buy one rand in the spot market, what will their future spot rate be in the aforementioned context?
2) Define IFE and explain the fact of how it occurs. Is there any deviation from it?

Answer 1

the B. Here spot rate indicates the current price of market for which the pusset is bought or sold for the immediate delivery. > Future-spot rate = (spot rate) x ( 1+ foreign praterest date) (It domestic Prsterest rate) = 50 X (1+61) (1+12-13) = 50X (1+ 0.06) (1+0+12) = 50 x 11.06 009 1012 = 50 x 0.946428 47•321 2 The International Fisher Effect (IPE) States that differences in the nominal interest rates between countries can be used to predict changes in the exchange rates → As per IFE, countries with higher nominal Pinterest rates experience hegher rates of inflation, which will result in the cussency depreciation against

when it comes to practice, evidence for the IFE is mined and also in recent years the direct estimation of currency exchange moverments from the expected inflation is more common.