Two simple questions, and I need them before 6pm tonight:
- Assume the interest rate on a one-year U.S. government debt security is currently 9.5 percent compared with a 7.5 percent on a foreign country’s comparable maturity debt security. If the U.S. dollar value of the foreign country’s currency is $1.50, what is the expected exchange rate one year from now based on interest rate parity?
- Using the three term structure theories (Unbiased expectations, Liquidity Preference, Market segmentation), create a forecast regarding the shape of next year’s term structure for interest rates. What data would be needed? How would that data be used to estimate changes in the term structure between this year and the next?