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 United States 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. According to the IFE, what should the spot rate of the euro in one year be? If the spot rate of the euro in one year is $1.00, what is Beth’s percentage return from her strategy? If the spot rate of the euro in one year is $1.08, what is Beth’s percentage return from her strategy? What must the spot rate of the euro be in one year for Beth’s strategy to be successful？

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 United States 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. According to the IFE, what should the spot rate of the euro in one year be? If the spot rate of the euro in one year is $1.00, what is Beth’s percentage return from her strategy? If the spot rate of the euro in one year is $1.08, what is Beth’s percentage return from her strategy? What must the spot rate of the euro be in one year for Beth’s strategy to be successful？

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter11: Managing Transaction Exposure

Section: Chapter Questions

Problem 1ST

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Concept explainers

Exchange Rate Risk

It is the possibility that the value of a currency will fluctuate in the future. In the wake of globalization, business establishments have increasingly ventured into international markets. The volume of international trade has prospered excellently in the near past and is expected to be more affluent in the future. The use of exchange-traded derivative financial instruments has been multi-folded to provide for the requirements of various MNCs and offshore potential investors. Most banks and financial institutions have helped integrate the global economies. Our Government has introduced some bold and extreme measures to fulfil the purpose behind the fiscal, industrial, and monetary policies. The enactment of GST is a huge step towards streamlining the taxation system of the country. Owing to Covid-19, this aspect of corporate risk management has become critical.

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IFE

According to the IFE, what should the spot rate of the euro in one year be?
If the spot rate of the euro in one year is $1.00, what is Beth’s percentage return from her strategy?
If the spot rate of the euro in one year is $1.08, what is Beth’s percentage return from her strategy?
What must the spot rate of the euro be in one year for Beth’s strategy to be successful？

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