Question

3. a. Assume that the interest rate on Euro denominated assets is 5% and the interest rate on comparable dollar denominated assets is 10%. The spot exchange rate is $1/1E. If you expect the exchange rate changes to $1.05/1E, where would you want to keep your money? Calculate and show!

b. The current interest rates on dollar and pound denominated deposits are 2% in the US and 3% in the UK. The current spot exchange rate is $2/1Pound. If the forward exchange rate offered is $1.90/1Pound, where would you invest? - Calculate!

Alternatively, if the forward exchange rate offered is $2.02/1Pound, where would you invest? Calculate!

c. Using Real exchange rate (what happens to X and M) – what happens to US exports and Imports in general following the appreciation of the dollar (signs)!

e                R               X               M

Next, as a result, which of the following groups would tend to support appreciation of the dollar? Why?

• Aircraft manufacturers producing for exports

• The United Auto Workers working in import competing industries

• Consumers of low cost imported footwear

Answer 1

Assuming RE- 5% , EİLE și.05 SSuww SLE R. om holds asset ruu yield Kaapma リ 1RP equah on: RHSRse find oitaole 4o Tham People w inves muS I mslead RHS : 31, Γ (2.02-2 S/L Thun People wu mvest m uk

As oua* douovr ri ses , do uax danom naked good in export ecom expenxire ama import dearer byt or* rises Th import compehtin^ ention and de mand . alo or frotwars see nuin purchas' ne arov tna spt Ppre