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Explain how ppp will be restored

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Reference no: EM132674591

1. One year interest rate $: ?5% -51/4%One year interest rate ¥: 2% -21/4%

On the Forex market, you observe the following hypothetical quotes.

Spot:???$:¥ = 175.00 - 182.10

What should be the quote for the 120-day forward exchange rate $:¥?

2. Suppose that the one-year interest rate is 10 percent in the United Kingdom. The expected annual rate of inflation for the coming year is 4 percent for the United Kingdom and 7 percent for Switzerland. The current spot exchange rate is £:SFr = 3.75.

Using the precise form of the international parity relations, compute the one-year interest rate in Switzerland, the expected Swiss franc to pound exchange rate in one year, and the one-year forward exchange rate.

3. Suppose that last year's value of the yen was $0.0087. Today, the one-year inflation rate in the United States is 4 percent, and the one-year inflation rate in the Japan is 5 percent.

a. What should the currency movement on the yen over the last year be? Show your work.

b. If today's actual spot rate on the yen is $.0085, is the yen overvalued or undervalued? Are we below or above the PPP line?

c. Explain how PPP will be restored.

4. Provide the most recent U.S. Balance of Payments. Make sure to give the date and source as part of your answers.

Reference no: EM132674591

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