What would happen to exchange and interest rates

Assignment Help Financial Management

Reference no: EM131332661

An asset manager has conducted an extensive econometric study and proposes a forecasting model. He has found that a currency with a high interest rate tends to appreciate relative to a currency with a low interest rate. The simple forecasting model for the one-year exchange rate is that a currency should appreciate over the year by the amount of the interest rate differential quoted today. For example, if the Australian dollar exchange rate is AUD/$ = 2 and the one-year interest rates in AUD and $ are 8% and 4%, respectively, the U.S dollar should move up by 4% relative to the Australian dollar, and your forecast for the exchange rate at the end of the year is AUD/$ = 2.26. What is the current forward exchange rate? Show your work. What type of forward transaction would you conduct to capitalize on your forecast? Explain. If everyone were using your model and following your strategy, what would happen to the exchange and interest rates? Explain.

Reference no: EM131332661

Questions Cloud

Situation presented by a state of the world : Construct a belief space in which the described situation is represented by a state of the world and indicate that state.

Write a refelection paper about the given case : The student will research and review five selected case studies and reflection on the case. Reflection will include summary information, outcome information and discussion as to how this case impacts the study of comparative crime and justice poli..

Construct a belief space : Construct a belief space in which the described situation is represented by a state of the world and indicate that state.

Create a cash budget for three-month period ending december : Prepare a cash budget for the three-month period ending December 31. A merchandise purchases budget in units and in dollars. Show the budget by month and in total.

What would happen to exchange and interest rates : An asset manager has conducted an extensive econometric study and proposes a forecasting model. What type of forward transaction would you conduct to capitalize on your forecast? Explain. If everyone were using your model and following your strateg..

Examine issue that may occur during the hr planning process : Imagine you are the HR manager of a U.S. company looking to expand in another country. You need to learn about the culture before sending expatriates abroad to work. Use the Internet to research the culture in a country of your choosing as it rela..

Construct a belief space : John, Bob, and Ted meet at a party in which all the invitees are either novelists or poets.- Construct a belief space describing the beliefs of John, Bob, and Ted about the others' profession.

What is the p-value associated with test : Assuming the life length of this type of lightbulb is normally distributed, what is the p-value associated with this test? Place your answer, rounded to 3 decimal places, in the blank. For example, 0.234 would be a legitimate entry.

Formulate null hypothesis and alternative : An annual survey of first-year college students asks 270,000 students about their attitudes on a variety of subjects. According to a recent survey, 54% of first-year students believe that abortion should be legal. Use a 0.05 significance level to ..

User Account

All Pages