please answer the 4 following Qustions: 1.According to the international Fisher
ID: 2741366 • Letter: P
Question
please answer the 4 following Qustions:
1.According to the international Fisher effect, if U.S. investors expect a 3% rate of domestic inflation over one year, and a 2% rate of inflation in European countries that use the euro, and require a 2% real return on investments over one year, the nominal interest rate on one-year U.S. Treasury securities would be:
A.3% B.5% C.2% D.4%
2.The existing spot rate of the Canadian dollar is $.80. The premium on a Canadian dollar call option is $.04. The exercise price is $.82. The option will be exercised on the expiration date if at all. If the spot rate on the expiration date is $.89, the net profit per unit is:
A.$0.03 B.$0.02 C.$0.01 D.$0.04
3.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?
A
purchasing power parity (PPP).
B
interest rate parity (IRP).
C
triangular arbitrage.
D
international Fisher effect (IFE).
4.Among the reasons for government intervention are:
A
to smooth exchange rate movement.
B
to establish implicit exchange rate boundaries.
C
to respond to temporary disturbances.
D
all of the above
A
purchasing power parity (PPP).
B
interest rate parity (IRP).
C
triangular arbitrage.
D
international Fisher effect (IFE).
Explanation / Answer
1.
Nominal rate of interest = Real rate of interest + Domestic rate of inflation = 2% + 3% = 5%
Hence, Answer is B.5%
2.
Exercise price = $0.82
Spot rate on exercise rate = $0.89
Premium on call option = $0.04
Net profit = (Spot rate on exercise date – Exercise price) – Premium = ($0.89-$0.82) - $.04 = $0.07 - $0.04 = $0.03
Hence, Answer is A.$0.03
3.
Answer is B. Interest rate parity.
4.
Answer is D. all of the above.
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