Reference no: EM13644668

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? <br/> <br/> 1.3479 <br/> <br/> 1.5597 <br/> <br/> 1.4289 <br/> <br/> 1.4713 <br/> <br/>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: <br/> <br/> 2% <br/> <br/> 3% <br/> <br/> -2% <br/> <br/> 5.06% <br/> <br/> 8.15% <br/> <br/>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 ________. <br/> <br/> overvalued; approximately 21% <br/> <br/> overvalued; approximately 27% <br/> <br/> undervalued; approximately 21% <br/> <br/> undervalued; approximately 27% <br/> <br/> <br/>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? <br/> <br/> 1.905% <br/> <br/> 2.068% <br/> <br/> 2.048% <br/> <br/> 2.00% <br/> <br/>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. <br/> <br/> $ 4,250 <br/> <br/> SEK 4,250 <br/> <br/> $ 3,118 <br/> <br/> SEK 3,118 <br/> <br/>