Chapter 8
Q. 8.ST.5
Assume that the Australian dollar’s spot rate is $.90 and that the Australian and U.S. one-year interest rates are initially 6 percent. Then assume that the Australian one-year interest rate increases by 5 percentage points, while the U.S. one-year interest rate remains unchanged. Using this information and the international Fisher effect (IFE) theory, forecast the spot rate for one year ahead.
Step-by-Step
Verified Solution
e_{f}=\frac{1+i_{b}}{1+i_{f}}-1
=\frac{1+.06}{1+.11}-1
\cong -.045 , or -4.5%
S_{t+1}=S(1+e_{f})= $.90 [ 1 + ( -.045 ) ]
= $.8595