Chapter Review and Self Test Problems

22.1 Relative Purchasing Power Parity The inflation rate in the United States is projected at 3 percent per year for the next several years. The New Zealand inflation rate is projected to be 5 percent during that time. The exchange rate is currently NZ$ 1.66. Based on relative PPP, what is the expected exchange rate in two years?

22.2 Covered Interest Arbitrage The spot and 360-day forward rates on the Swiss franc are SF 2.1 and SF 1.9, respectively. The risk-free interest rate in the United States is 6 percent, and the risk-free rate in Switzerland is 4 percent. Is there an arbitrage opportunity here? How would you exploit it?

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