(20 points) 7. The following exchange rates exist on a particular day: Euro 90-d
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Question
(20 points) 7. The following exchange rates exist on a particular day: Euro 90-day interest rte = 290 percent U.S. 90-day interest rate = 4 percent Spot exchange rate $1.40/euro 90-day forward exchange rate $1.427/euro Financial investors in all countries have the expectation that the spot exchange rate in 90 days will days? be 0.710 euro/S1. Are investors expecting the euro to appreciate or depreciate during the next 90- Based on uncovered investment, in which direction (i.e., U.S. or European Union) will there be an incentive for uncovered investment flow, based on comparison of returns? a. b.Explanation / Answer
a). Answer :- Euro is expected to appreciate in the next 90 days.
Explanation :- 1 Euro = $ 1.40 (Spot exchange rate)
1 $ = 0.7143 Euro (Spot exchange rate) ( 1 / 1.40 = 0.7143)
1 $ = 0.7100 Euro (Expected Spot exchange rate in the next 90 days)
From the above two currency quotation, it is clear that dollar is expected to depreciate and euro is expected to appreciate during the next 90 days.
b). Answer :- Under the given circumstances, Euro is expected to quote at a premium in USA as the interest rate is higher in the USA.
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