# finance

lecturer kimberly

My currency/country = Euro

1. Fisher Effect

1) Check the money market rate (one year government security) of US\$ and your

currency at two time points - beginning of year 2013 and 2014. Make comparison.

2) Find the inflation rates of US and your country in year 2013 and 2014. Make

comparison.

3) Use the above information to test Fisher Effect for both year 2013-2014 and year

2014-2015 periods, for both US and your country.

Note: Fisher Effect explains relationship between normal interest rate, real interest

rate and inflation. 1 + i\$ = (1 + \$ ) × E(1 + \$)

2. International Fisher Effect. Use above information and the information from Part I

question 6 to test International Fisher Effect. Does it hold for year 2013-2014 and year

2014-2015 periods?

Note: International Fisher Effect explains relationship of relative interest rate and relative

inflation rate between two countries.

3. Purchase Power Parity

Use information from question 1 and question 6 in part I to check with Purchase Power

Parity (relative PPP in particular) holds.

Note: Relative PPP states that the rate of change in the exchange rate is equal to

differences in the rates of inflation.

4. Forward Rate and Interest Rate Parity

1) Does forward market exist on your currency against US Dollar and/or other major

currencies? Find the one year forward rate at the beginning of year 2013 and

2014.

2) Compute the difference between forward rate and spot rate. Is it a premium or

discount at the beginning of year 2013 and 2014?

3) Use above results and information from question 1 to check if interest rate parity

holds for year 2013 and 2014.

4) Can you identify any arbitrage opportunity? Note: Interest Rate Parity explains

relationship of relative interest rate and the forward premium or discount.

1. Decide whether you would do business in that country/region you have been

investigating

(separate one group into two teams to debate on which of the two countries/regions to

invest).

production,

franchising/licensing, joint venture, M&A, direct investment, portfolio investment …),

why?

a) You can invest (buy and sell, long or short) in currency. You then have to analyze and

forecast the trends of exchange rate in 1 to 5 year, whatever horizon of investment you

feel comfortable with.

b) You can invest in the aggregate economy by buying country specific fund/index. You

have to find or create one.

c) You can conduct the traditional import export business. You then have to identify what

industry sector and product/service to trade.

e) You can choose joint venture or wholly owned subsidiary. You can make greenfield

development or M&As. You have to identify product/service and partner/target.

f) You can invest in individual company stocks, industry ETFs, bonds, derivatives or

alternative markets. You have to pick specific one, analyze and justify it.

• Posted: 3 years ago
• Due:
• Budget: \$30
• Not rated

### urgent finance

My currency/country = Euro

1. Fisher Effect

1) Check the money market rate (one year government security) of US\$ and your

currency at two time points - beginning of year …