Unbiased expectations-liquidity preference

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Reference no: EM131616748

1. Assume the interest rate on a one-year U.S. government debt security is currently 9.5 percent compared with a 7.5 percent on a foreign country's comparable maturity debt security. If the U.S. dollar value of the foreign country's currency is $1.50, what is the expected exchange rate one year from now based on interest rate parity?

2. Using the three term structure theories (Unbiased expectations, Liquidity Preference, Market segmentation), predict the shape of of next year's forecasted term structure for interest rates. What data would be needed? How would that data be used to estimate changes in the term structure between this year and the next?

Reference no: EM131616748

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