Fx forcasting using purchasing power parity

Reference no: EM13747064

1. [FX forcasting using Purchasing Power Parity] The expected inflation rate now until the end of 2015 is 2.5% in the US, and 12% in Argentina, respectively. The current spot exchange rate between Argentina peso (AP) and the US dollar is AP8.2/$. What will be the expected exchange rate between Argentina peso (AP) and the US dollar at the end of 2015? Explain why.

2. Discuss the main strengths and weaknesses of each of the following theories of FX rate determination.

PPP
Asset market approach to the FX rate determination
Monetary approach to FX rate determination

3. The Federal Reserve sets the target growth rate of money (M1) at 2% from now until the end of this year, while the European Central Bank (ECB) sets its target growth rate of money at 7% during the same period. The current spot rate is $1.12 per euro. What do you expect will be the spot rate at the end of this year? Explain why. Which theory do you apply for your forecasting?

4. Please define and update the so-called TED spread (which we discussed in class) upto recent years. Discuss the main implications of the sudden changes of the TED spread on international lending and borrowing. What have been the examples of those sudden changes?

Reference no: EM13747064

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