Solved: What is the expected spot rate of the euro in one year, Finance Basics

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What is the expected spot rate of the euro in one year

Problem:

Integrating IRP and IFE. Assume the following information is available for the U.S. and Europe:

U.S. Europe

Nominal interest rate 4% 6%

Expected inflation 2% 5%

Spot rate - $1.13

One-year forward rate - $1.10

a. Does IRP hold?

b. According to PPP, what is the expected spot rate of the euro in one year?

c. According to the IFE, what is the expected spot rate of the euro in one year?

d. Reconcile your answers to parts (a). and (c).

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Finance Basics: What is the expected spot rate of the euro in one year

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