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Fisher Effect Dissertation Example

4 / 5. 1

Discipline:
Finance
Chapter:
Literature Review
Level:
Bachelor's
Pages:
1
Words:
275
View Sample
Name: Instructor: Subject: Date: Graded Homework 1.According to Fisher Effect, real required return, also known as the real interest rate is the difference between nominal rate and the expected inflation (Hatemi-J 117). i.e. R nominal =RRR + R inflation; R nominal= 5% +2%= 7% 2.The expected future spot rate is calculated by multiplying the current spot rate by a ratio of the domestic inflation rate to the foreign inflation rate. In this case, the foreign inflation rate is 5%, and the domestic rate is 3%. In two years, the spot rate would be 1.3520 x (1.03/1.05)^2 = 1 pound = $1.300986 3.According to the international Fisher effect, the spot exchange rate expected in one year equals 1.2526 x 1.03/1.01 = 1 pound = $1.277404 4.According to Interest Rate Parity with no arbitrage, the implied discount or premium is the difference between the interest rates on the currencies in question. In this case, the implied forward premium would be 1.02-0.99834= 0.02166. It will be a premium since the rate on the yen is lower than the rate on the U.S dollar. 5.When finding the rate at which interest rate parity between two currencies will hold, four variables are usually considered: S = current spot exchange rate=? F = current forward exchange rate= 1.0628 i(d) = domestic interest rate=0.06x3/12 (90 days) i(f) = foreign interest rate=0.03x3/12 (90 days) The general formula is (1 + i(d)) = S/(F (1 + i(f))). 1+0.015= S/1.0628x 1.0075 1.015=S/ 1.070771 S=1.015x1.070771= 1.086833 6. (a).Break-even point= Put option price-Premium paid =$1.09-$001=$1.08 Profit=$1.08-$1.02= $0.06 (b).Net profit graph for buying this put option. (c).Net profit graph for selling this put option 7. (a).Call Option Profit/Loss = Price at maturity - Breakeven Point Break-even point = Call Option Strike Price + Premium Paid =$1.26+$0.01= $1.27 Profit= $1.30- $1.27= $0.03 (b).Net profit graph for buying this call option. 8. (a).If the money is invested in the US, then after one...
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