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International Fisher Effect (IFE)

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Explain the international Fisher effect (IFE).

What is the rationale for the existence of the IFE?

What are the implications of the IFE for firms with excess cash that consistently invest in foreign Treasury bills?

Explain why the IFE may not hold.

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Explain the international Fisher effect (IFE).

ANSWER: The IFE suggests that a currency's value will adjust in accordance with the differential in interest rates between two countries.

What is the rationale for the existence of the IFE?

ANSWER: The ...

Solution Summary

This posting answers a set of questions about the International Fisher Effect (IFE).

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Question about International Fisher Effect (IFE)

24. Beth Miller does not believe that the international Fisher effect (IFE) holds. Current one-
year interest rates in Europe are 5 percent, while one-year interest rates in the U.S. are
3 percent. Beth converts $100,000 to euros and invests them in Germany. One year
later, she converts the euros back to dollars. The current spot rate of the euro is $1.10.

a. According to the IFE, what should the spot rate of the euro in one year be?

b. If the spot rate of the euro in one year is $1.00, what is Beth's percentage return from her
strategy?

c. If the spot rate of the euro in one year is $1.08, what is Beth's percentage return from her
strategy?

d. What must the spot rate of the euro be in one year for Beth's strategy to be successful?

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