Chapter 9, Problem 3ST

Suppose we have the following Treasury bill returns and inflation rates over an eight year period:   Year Treasury Bills Inflation 1 10.45%         12.55%         2 11.36            16.00            3 9.06            10.29            4 8.34            7.97            5 8.88            10.29            6 11.23            12.77            7 14.11            16.98            8 15.97            16.90                a. Calculate the average return for Treasury bills and the average annual inflation rate for this period. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)         Treasury bills  %     Inflation  %       b. Calculate the standard deviation of Treasury bill returns and inflation over this period. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)         Treasury bills  %     Inflation  %…

Mexican interest rates are normally substantially higher than U.S. interest rates. What does this imply about the forward rate as a forecast of the future spot rate? Does the forward rate reflect a forecast of appreciation or depreciation of the Mexican peso? Explain how the degree of the expected change implied by the forward rate forecast is tied to the interest rate differential. Do you think that today’s forward rate or today’s spot rate of the peso provides a better forecast of the future spot rate of the peso?

1. Which of the following regarding inflation is true? (a) If CPI changes from 100 to 105 in a year and then changes from 105 to 100 in the following year, then the initial rate of price increase is greater than the following rate of price decrease. (b) If CPI doubles in one year and then remains at that high level for five years, it means that the country suffers high inflation for five years. (c) If CPI is cut by half in one year, it means that the deflation rate of that year is 0.5%. ( d) Increasing CPI means that money is getting more and more valuable. (e) None of the above.

Suppose the spot rate for the Canadian dollar is CAD1.034 = USD1, the 3-month forward rate is CAD1.036 = USD1, and the 1-year forward rate is CADS1.039. = USD1. If no other information is available, what will be your guess about the spot rate in 1 year?

All would indicate that hyperinflation exists, except: a. The general population regards monetary amounts in terms of relatively stable foreign currency. b. The cumulative inflation rate over three years is approaching or exceeds 100%. c. Inflation rates have exceeded interest rates in three successive years. d. The general population prefers to keep its wealth in nonmonetary assets.

If the Canadian dollar appreciate by 5% relative to the British pound, what will be the percentage British pound depreciate?

Consider the following table for an eight-year period:  Year T-bill return Inflation 1 7.47 % 8.53 % 2 8.94   12.16   3 6.05   6.76   4 5.97   5.04   5 5.63   6.52   6 8.54   8.84   7 10.74   13.11   8 13.00   12.34       Calculate the average return for Treasury bills and the average annual inflation rate (consumer price index) for this period. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)      Average return for Treasury bills  % Average annual inflation rate  %   Calculate the standard deviation of Treasury bill returns and inflation over this time period. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)      Standard deviation of Treasury bills  % Standard deviation of inflation  %    Calculate the real return for each year. (A negative answer should be indicated by a minus sign. Leave no cells…

1, Consider the following table for an eight-year period: Year T-bill return Inflation 1 7.47% 8.53% 2 8.94 12.16 3 6.05 6.76 4 5.97 5.04 5 5.63 6.52 6 8.54 8.84 7 10.74 13.11 8 13.00 12.34  a, Calculate the average return for Treasury bills and the average annual inflation rate (consumer price index) for this period. b, Calculate the standard deviation of Treasury bill returns and inflation over this time period.  c, Calculate the real return for each year. d, What is the average real return for Treasury bills?