International Finance

nternational Finance  

                                Name:_____________________

Spring 2018           

1. In early 1990, Japanese and German interest rates rose while U.S. rates fell. At the same time, the Japanese yen and German Mark, the currency of Germany before the introduction of Euro, fell against the U.S. dollar. What might explain the movement of Japanese yen and German Mark against U.S. dollar? (2 points)

2. Nominal interest rates in Cyprus are 7%, while nominal interest rates in the U.S. are 5%. The spot rate for the Cyprus pound (CYP) is $1.50. After supply and demand for the Cyprus pound has adjusted in the manner suggested by the international Fisher effect (IFE), what is the new exchange rate for the Cyprus pound? (2 points)
3. Huge Corporation has just initiated a market-based forecast system using the forward rate as an estimate of the future spot rate of the Japanese yen (¥) and the Australian dollar (A$). Listed below are the forecasted and realized values for the last period:

According to this information and using the absolute forecast error as a percentage of the realized value, what is the forecast error for Australian dollar and Japanese Yen? Which currency has Huge Corp. forecasted more accurately? (2 points)

4. Assume the following information is available for the U.S. and Europe:

a). Does IRP hold? (1 point)

b). According to PPP, what is the expected spot rate of the euro in one year? (1 point)

c). According to the IFE, what is the expected spot rate of the euro in one year? (1 point)

d). Reconcile your answers to parts (a) and (c). (1 point)