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What should be the forward contract rate

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Assignment

1. If a Euro buys 1.2US$, and US interest rate is 1%, and Euro rates are 2%, what should be the forward contract rate so that covered interest parity hold.

2. Assume I am a US investor. 1$=100 Yen, at spot market now. I borrow 1M$ from a bank at 1%, and will earn 5% in Japan when I put that money in Japanese CD's. What is the exchange rate that I can break even or make money?

3. Relative PPP it tells that if inflation in Brazil is 10% on average in long run, and USA is 2%, we expect US$ to appreciate how much?

S=US$/Brazilian real.

4. So a US productivity (traded/nontraded) goes up faster than Brazil, then we expect real exchange rate to appreciate?

Reference no: EM131920015

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