Chase Econometrics has just published projected inflation rates for the United States and Euro-zone for the next five years. U.S. inflation is expected to be 2% per year, and Euro-zone inflation is expected to be 3.5% per year. If the current exchange rate is 1.4500 $ per €, what should the expected PPP implied €/$ exchange rates be five years from now?
1.3479
1.5597
1.4289
1.4713
According to the international Fisher effect, if U.S. investors expect a 5% rate of domestic inflation over one year, and a 2% rate of inflation in Japan, and require a 3% real return on investments over one year, the nominal interest rate on one-year U.S. Treasury securities would be:
2%
3%
-2%
5.06%
8.15%
According to the Big Mac Index, the implied PPP exchange rate is Mexican peso 8.50/$1 but the actual exchange rate is peso10.80/$1. Thus, at current exchange rates the peso appears to be ________ by ________.
overvalued; approximately 21%
overvalued; approximately 27%
undervalued; approximately 21%
undervalued; approximately 27%
Assume a nominal interest rate on one-year U.S. Treasury Bills of 4.60% and a real rate of interest of 2.50%. Using the Fisher Effect Equation, what is the expected rate of inflation in the U.S. over the next year?
1.905%
2.068%
2.048%
2.00%
Suppose that the current spot exchange rate is 6.25 Swedish Krona per $ and the three-month forward exchange rate is 6.28 SEK per $. The three-month interest rate is 5.6% per annum in the U.S. and 8.8% per annum in Sweden. Assume that you can borrow up USto $1,000,000 or SEK 6,250,000. Can you generate arbitrage profits? Show your profits both in USD and SEK terms.
$ 4,250
SEK 4,250
$ 3,118
SEK 3,118