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##### Suppose that the interest rates in the U.S.

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**Question**

1. Suppose that the interest rates in the U.S. and Germany are equal to 5%, that the forward (one year) value of the ? is F$/? = 1$/? and that the spot exchange rate is E$/? = 0.75$/?. Please answer the following questions by explaining all steps of your analysis;Does the covered interest parity condition hold? Why or why not?;How could you make a riskless profit without any money tied up assuming that there are no transaction costs in buying and or selling foreign exchange?;2. Suppose that two countries, Britain and the U.S. produce just one good - beef. Suppose that the price of beef in the U.S. is $2.80 per pound, and in Britain it is ?3.70 per pound.;According to PPP theory, what should the $/? spot exchange rate be?;Suppose the price of beef is expected to rise to $3.10 in the U.S. and to ?4.65 in Britain. What should be the one year forward $/? exchange rate?

Paper#34166 | Written in 18-Jul-2015

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