Answer the following questions after reading the chapter and working the recommended problems.
Show your work in Microsoft Word (Microsoft Word and Excel are available for free download on the CSUN
IT page: https://www.csun.edu/it/microsoft-office ). Cite sources.
Assume the one-year interest rate is 10% on British pounds and 9% on U.S. dollars.
If the current exchange rate of the pound is $1.62, what is the expected future spot in one year?
Suppose a change in expectations causes the expected future spot rate to decline to $1.53. What should
happen to the U.S. interest rate?
Beth Miller does not believe that the International Fisher Effect holds. Current 1-year interest rates in
Europe are 4%, while 1-year interest rates in the U.S. are 3%. Beth converts $100,000 to euros at $1.10
and invests them in Germany. One year later, she converts the euros back to dollars.
According to the IFE, what should the spot rate of the euro be in 1 year?
If the spot rate of the euro in 1 year is $1.00, what is Beth’s percentage return from her strategy?
If the spot rate of the euro in 1 year is $1.08, what is Beth’s percentage return from her strategy?
What must the spot rate of the euro be in 1 year for Beth’s strategy to be successful?
A U.S. firm expects that the British pound will depreciate from $1.70 to $1.65 in one year. The firm has no
spare cash, but it could borrow either 1 million dollars at 6% or 1 million pounds at 5% for a year.
Determine the profit or loss for the firm if they pursue a strategy to capitalize on the expected depreciation
of the pound.