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October 18, 2020
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October 18, 2020

The interest rate on South Korean government securities with one-year maturity is 4 percent, and the expected inflation rate for the coming year is 2…

  1. The interest rate on South Korean government securities with one-year maturity is 4 percent, and the expected inflation rate for the coming year is 2 percent. The interest rate on US government securities with one-year maturity is 7 percent, and the expected rate of inflation is 5 percent. The current spot exchange rate for Korean won is $1 = W1,200. Forecast the spot exchange rate one year from today. Explain the logic of your answer.
  2. Two countries, Britain and the United States, produce just one good: beef. Suppose the price of beef in the United States is $2.80 per pound and in Britain it is £3.70 per pound.
  3. According to PPP theory, what should the $/£ spot exchange rate be?
  4. Suppose the price of beef is expected to rise to $3.10 in the United States, and to £4.65 in Britain. What should the one-year forward $/£ exchange rate be?
  5. Given your answers to parts a and b, and given that the current interest rate in the United States is 10 percent, what would you expect the current interest rate to be in Britain?
  6. You manufacture wine goblets. In mid-June you receive an order for 10,000 goblets from Japan. Payment of ¥400,000 is due in mid-December. You expect the yen to rise from its present rate of $1 = ¥130 to $1 = ¥100 by December. You can borrow yen at 6 percent per annum. What should you do?

 

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