a. What has happened to the yen-dollar or yen-euro rate over the last month?
What factors help explain it?
b. U.K. interest rates are 4%, U.S. interest rates are 3%, and the current exchange rate is
$1.60:£1. What should be the 6 month forward rate? The one year ahead forward rate?
c. In response to a 1% increase in inflation, the central bank raises nominal interest rates
by 1%. Use UIP and PPP to work out what should happen to the current spot rate. How
would your answer differ if the central bank raised rates by 2%? Why?
d. How hard is it for you to find information about companies listed on foreign equity
markets? Does this explain the home bias puzzle?