1.Please explain the interest rates said ( interest rate parity:IRP ) theory, if

Question

1.Please explain the interest rates said ( interest rate parity:IRP ) theory, if Mexico 6 - month interest rates for the United States, 7 % 5 %, according to the IRP the theory of the forward exchange rate changes will be how to change?

2.Please say if the United States a rise in interest rates, how currency exchange rate will be changes in Canada do you think?Use of theory to explain in detail.

3,If your boss to ask you to predict exchange rate of Taiwanese dollar(NT$), Could you tell me you will be how to explain the NT the future of the foreign exchange?

4.Please explain what is meant by the international snowfall effect and the purchasing power evaluation?

5.Please explain what is meant by the international fisher effect(IFE)and the purchasing power evaluation?

Explanation / Answer

(1) Mexico 6 month interest rate = 7 % and US 6 month interest rate = 5 %

Current Exchange Rate = 0.049 $ / Peso ("Data taken from Google Finance")

The Interest Rate Parity Equation States that for an exchange rate of say S units of domestic currency = 1 unit of foreign currency, the forward exchange rate F( units of domestic currency = 1 unit of foreign currency) is determined by the following relationship:

F/S = (1+id) / (1+if) where id is the domestic interest rate and if is the foreign interest rate.

In this context Mexican peso is the foreign currency and $ is the domestic currency.

Therefore, forward exchange rate after 6 months = F = {1.05 / 1.07} x 0.049 = 0.0481 $ / Peso

This relationship indicates that if the domestic interest rate < foreign interest rate, the ratio (1+id/1+if) < 0, thereby making the forward rate F < S (the currency exchange rate). This would imply that the domestic currency appreciated with respect to the foreign currency if the domestic interest rate < foreign interest rate.

(2) If the US interest rates rise with respect to the Canadian interest rates, the Canadian $ would appreciate against the US $ as per the IRP (Interest Rate Parity) relationship described in part (A). This means that lesser Canadian $ would be purchasable for 1 US $ after interest rates rise as compared to before interest rates rise.

(3) The prediction of NT $ with respect to US $ would involve determining the expected interest rates in Taiwan and the US for the time period in future under consideration. This would be followed by determining the current exchange rate between the two. Plugging the Taiwanese Interest Rate, US Interest Rate and Current Exchange Rate into the IRP relationship from part (A) one can determine the forward exchange rate or future exchange

NOTE: Please raise separate queries for solutions to the remaining unrelated questions.

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