Comment on the evolution of the real exchange rate

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Reference no: EM133116883

QUESTION 1

Period

€/$ Rate

Nominal €/$ index

Eurozone Price Index

US Price Price Index

Real €/$ Index

1

€1.10/$1

100

100

100

100

2

€0.90/$1

81.82

105

110

85.72

3

€1/$1

90.91

115

120

94.86

4

€0.95/$1

86.36

130

140

93

5

€1.20/$1

109.09

135

145

118.04

  1. Comment on the evolution of the real exchange rate of the dollar and what it implies for the United States competitiveness.

QUESTION 2

(i) What is the approximate annualized yield on a 6-month Treasury bill that is sold at £99 in the primary market? Show your calculations.

(ii) A 10-year Treasury bond (TBOND1) is sold on the market one day at 100 with an annual coupon of £7. The following day bad news hits the global stock markets and a new 10-year Treasury bond (TBOND 2) is sold on the market at a £5 annual coupon. What is the approximate new secondary market price of TBOND1? Show your calculations.

(iii) In a world where interest rates are rising and in your view are likely to continue to do so would you prefer to buy or short government bonds? Which would you be more likely to buy or short 5 years bonds or 20-year bonds? Explain your reasoning.

Reference no: EM133116883

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