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1. Suppose the expected real interest rate in Hong Kong is 5 percent per year while that in Singapore it is 2 percent per year. What do you expect to happen to the real HK$/SNG exchange rate over the next year?

2. Suppose the expected real interest rate in the United States is 9 percent per year while that in Europe is 3 percent per year. What do you expect to happen to the real dollar/euro exchange rate over the next year?

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Related questions

Sapling Independent is a small bank located in Hong Kong. Sapling Independent is interested in increasing the number of mortgages it writes, but it is constrained by how many deposits it has. It has decided to borrow 12,000,000 euros from a large German bank for one year. The German bank is going to charge Sapling Independent an interest rate of 1.500% per year. The German bank insists on being repaid in euros. After Sapling Independent borrows the money, it is going to have to convert the money into Hong Kong dollars at an exchange rate of 13.000 HK dollars/euro. Then Sapling Independent is going to lend all the money at an interest rate of 6.000% per year. At the end of one year, all the money that Sapling Independent lent will be repaid, plus interest. Finally, at the end of one year, Sapling Learning is going to have to repay its loan to the German bank in euros. At the end of the year, the exchange rate is 11.500 HK dollars/euro. What is Sapling Independent's profit from this series of transactions in Hong Kong dollars?

You are given the following information. The current dollar-pound exchange rate is $2 per pound. A U.S basket that costs $100 would cost $120 in the United Kingdom. For the next year, the Fed is predicted to keep U.S. inflation at 2% and the Bank of England is predicted to keep U.K inflation at 3%. The speed of convergence to absolute PPP is 15% per year.

a What is the expected U.S minus U.K. inflation differential for the coming year?

b What is the current U.S real exchange rate qUS/UK with the United Kingdom?

c How much is the dollar overvalued / undervalued?

d What do you predict the U.S. real exchange rate with the United Kingdom will be in one year's time?

e What is the expected rate of real depreciation for the United States(versus the United Kingdom)?

f What is the expected rate of nominal depreciation for the United States(versus the United Kingdom)?

g What do you predict will be the dollar price of one pound a year from now?

Suppose the current dollar–pound exchange rate is $1.5 per pound. A U.S. basket that costs $100 would cost $120 in the United Kingdom. For the next year, the Federal Reserve is predicted to keep U.S. inflation at 2% and the Bank of England is predicted to keep U.K. inflation at 3%. The speed of convergence to absolute PPP is 15% per year.

1）What is the expected U.S. minus U.K. inflation differential for the coming year?
2) What is the current U.S. real exchange rate, q$/£, with the U.K.?
3) How much is the dollar overvalued/undervalued?
4) What do you predict the U.S. real exchange rate with the U.K. will be in one year’s time?
5) What is the expected rate of real depreciation for the U.S. (versus the U.K.)?
6) What is the expected rate of nominal depreciation for the U.S. (versus the U.K.)?
7) What do you predict will be the dollar price of one pound a year from now?

 

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