Reference no: EM131311825

Suppose you conduct currency carry trade by borrowing $1 million at the start of each year and investing in New Zealand dollar for one year. One-year interest rates and the exchange rate between the U.S. dollar ($) and New Zealand dollar (NZ$) are provided below for the period 2000 – 2009. Note that interest rates are one-year interbank rates on January 1st each year, and that the exchange rate is the amount of New Zealand dollar per U.S. dollar on December 31 each year. The exchange rate was NZ$1.9088/$ on January 1, 2000. Fill out the columns (4) – (7) and compute the total dollar profits from this carry trade over the ten-year period. Also, assess the validity of uncovered to negotiate its membership in the European Union. If this happens, it will boost the stock prices in Turkey. But, at the same time, he is quite concerned with the volatile exchange rates of the Turkish currency. He would like to understand what drives the Turkish exchange rates. Since the inflation rate is much higher in Turkey than in the U.S., he thinks that the purchasing power parity may be holding at least to some extent. As a research assistant for him, you were assigned to check this out. In other words, you have to study and prepare a report on the following question: Does the purchasing power parity hold for the Turkish lira-U.S. dollar exchange rate? Among other things, Mr. Mobaus would like you to do the following: a. Plot past annual exchange rate changes against the differential inflation rates between Turkey and the U.S. for the last 20 years. b. Regress the annual rate of exchange rate changes on the annual inflation rate differential to estimate the intercept and the slope coefficient, and interpret the regression results.