Why is uncovered interest parity called uncovered

Assignment Help Microeconomics

Reference no: EM131851843

Assignment

1 Theory and Empirics of Interest Parity

State the uncovered and the covered interst parity conditions.

1. Why is uncovered interest parity called uncovered? Does it have to hold? what assumptions are needed? How does it compare to covered interest parity?

2. The USD 3-month deposit (interest) rate and the GBP 3-month deposit rate are both 5.0%. What is the relationship between the current equilibrium USD/GBP exchange rate and its expected future level? Assume the expected USD/GBP exchange rate three months into the future remains constant at USD 1.50 per GBP. But the GBP 3-month deposit rate doubles to 10.0%. What is the new spot USD/GBP exchange rate in equilibrium.

3. Plot the difference between USA 3-Month Euro-dollar deposit rate and the UK 3-monthEuro-sterling deposit rate from January 2000 to December 2008. What do you observe?Now plot the expected exchange rate change at the three month horizon for the USD/GBP exchange rate, assuming that investors have perfect foresight so that the expected exchange rate equals the future realized spot rate. Does Uncovered Interest Parity seem to be satisfied in the data? Describe the steps you would have to take to check for covered interest parity in the data?

Data.

Please visit the Bank of England website in order to downloadthe end of month USD/GBP spot exchange rate (symbol: XUMLUSS),the end of month 3-month Euro-sterling deposit rate (symbol: IUMES3A), the end of month 3-month Euro-dollar deposit rate (symbol: IUMED3A), and the end of month USD/GBP 3-month Forward Rate (symbol: XUMLDS3). The deposit rates should be under "Overseas currency deposit rates (3 months)" in the "Wholesale interest and discount rates" category. The spot exchange rate can be found under the "Spot exchange rates" category. Be sure to select "against the sterling" header. The forward rate can be found under the "Sterling against US dollar forward rates"category. After you have made your selection click "ShowData", which will lead you to a page so that you can download the data series in Excel format.

Reference no: EM131851843

Questions Cloud

Interest had compounded annually : How much more could she have earned over a 5-year period if the interest had compounded annually?

Write a well-constructed statement giving your agreement : Write a well-constructed statement giving your agreement or disagreement with Tim Wise's assertion by illustrating your points using a population

Show that the family of weibull distributions : Show that the family of Weibull distributions W(a, ?) with two unknown parameters a and ? is not an exponential family.

A five-year note is signed for the balance : A five-year note is signed for the balance. The note will be paid in five equal year-end payments starting on December 31 of this year.

Why is uncovered interest parity called uncovered : Why is uncovered interest parity called uncovered? Does it have to hold? what assumptions are needed? How does it compare to covered interest parity?

Family of log-normal distributions : Is the family of log-normal distributions LN(µ, s2) with two unknown parameters µ and s2 an exponential family?

Explain what is reverse causality : Explain what is reverse causality? Find or develop a case (or an example) of possible reverse causality.

Derive the demand curves for ggc product in each market : Greener Grass Company (GGC) competes with its main rival, Better Lawns and Gardens (BLG), in the supply and installation of in-ground lawn watering systems.

Family of double exponential distributions : Show that the family of double exponential distributions DE(µ, ?) with two unknown parameters µ and ? is not an exponential family

User Account

All Pages