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Finish Chapter 7: Prob

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Finish Chapter 7: Prob. # 8,9,10 and Chapter 8: Prob. # 1,6,11 (Questions and Applications’ – at end of each chapter)

Chapter 7

8. Effects of September 11 The terrorist attack on the United States on September 11, 2001, caused expectations of a weaker U.S. economy. Explain how such expectations could have affected U.S. interest rates and therefore have affected the forward rate premium (or discount) on various foreign currencies.

9. Interest Rate Parity Explain the concept of interest rate parity. Provide the rationale for its possible existence.

10. Inflation Effects on the Forward Rate Why do you think currencies of countries with high inflation rates tend to have forward discounts?

Chapter 8

1. PPP Explain the theory of purchasing power parity (PPP). Based on this theory, what is a general forecast of the values of currencies in countries with high inflation?

6. Implications of IFE Explain the international Fisher effect (IFE). What is the rationale for the exis- tence of the IFE? What are the implications of the IFE for firms with excess cash that consistently invest in foreign Treasury bills? Explain why the IFE may not hold.

11. PPP Applied to the Euro Assume that several European countries that use the euro as their currency experience higher inflation than the United States, while two other European countries that use the euro as their currency experience lower inflation than the United States. According to PPP, how will the euro’s value against the dollar be affected?