Question

1.

A Singaporean citizen observes the one year interest rate for identical investments in the UK and Singapore are 6% and 7%, respectively. The current quotes for pounds and Singapore dollars are 1£ =$1.50 and S$=$.77. What should be the value of pounds in terms of Singapore dollars at the end of the year according to the international Fisher effect? Round intermediate steps to four decimals.

1.9299 |
||

.5086 |
||

1.9664 |
||

.5182 |

2.

Use the following information to answer the next two questions.

A Japanese investor notices the expected one year inflation rate in Japan and Mexico is 5% and 7%, respectively. The current spot rates for yen and pesos are as follows:

$.15/Mex$, ¥111.11/$

What should be the value of pesos in terms of yen at the end of the year according to relative PPP?

16.9842 |
||

16.3548 |
||

.0611 |
||

.0589 |

3. Use the information in #2

If the spot rate is ¥16.5/Mex$, the yen has depreciated in real terms according to relative PPP.

True

False

Answer #1

1. after one year, uk= 1.5*1.06 = $1.59/ pound

after one year, singapore= 0.77*1.07 = $0.8239/ S$

POUND/$= 0.8239/1.59 = 0.5182 (AFTER ONE YEAR) i.e. option 4

2. japan, yen/$= 111.11/1.05 = 105.8190 (after taking inflation into account)

mexico= peso/$= 1/0.15 = 6.67, 6.67/1.07 = 6.2305 (after taking inflation into account)

therefore, peso/yen= 6.2305/ 105.8190= 0.0589 (option4)

3. spot rate=byen 16.5/mex$

after inflation, 1/0.0589= yen16.984 / $ . therefore, yen has depreciated in real terms, true

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