Joan smith does not believe that international fisher effect (IFE) holds. Curren

Question

Joan smith does not believe that international fisher effect (IFE) holds. Current one-year interest rate in Europe are 5 % while one-year interest rate in US is 10 %. Joan converts $100,000 to euros and invest them in France. One year later, she coverts Euros back to dollars. The current spot rate of euro is $1.08.

If the spot rate of the euro in one year is $1.12, what is Joan’s percentage return from her strategy?

Continued from the above question what must the spot rate te of the Euro be in one year for Joan’s strategy to be successful?

Explanation / Answer

Nominal Amount =$100,000

Amount in Euros at Spot Rate =EUR 100,000/1.08 =EUR 92,592.59

Amount after 1 years if invested at 5% =EUR 1.05x92,592.59 =EUR 97,222.22

Amount in Dollar if converted at 1 year rate =$ 97,222.22 x 1.12 =$108,888.89

Percentage Return =(108,888.89 - 100,000)/100,000x100 =8.88%

For Joans strategy to be successful, spot rate of Euro in year should be at least =1.08 x (1+0.10)/(1+0.05) =$1.1314

Related Questions

Navigate

• Browse (All)
• Browse J
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.