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International Fisher Effect

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Mary Jones 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 United States are 3 percent. Mary converts $100,000 to euros and invest 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 be in one year be?
B) If the spot rate of the euro in one year is $1.00, what is Mary's percentage return from her strategy?

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Solution Summary

Calculates the expected spot rate of the euro be in one year using the International Fisher effect.

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International Fisher Effect (IFE)

Mary Jones does not believe that the International Fisher effec (IFE) holds. Current one-year interest rates in Europe are 5 percent, while one-year interest rates in the United States are 3 percent. Mary converts $100,000 to euros and invest them in ...

Purchase this Solution


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