Please do the 6 highlighted questions

transaction controls, or political risk. 7. The real interest rate is equal to the nominal interest rate minus the If real interest rates are equal in two countries, then the interest rate differential will equal to expected inflation rate differential, which in turn will equal to the forward premium or discount between two The term structure of interest rates is the relationship between inter- est rates on various bonds with different terms to maturity. 10. Differences between the term structure of interest rates in two coun- tries will reflect the expected exchange rate changes. 1. Suppose you want to infer expected future exchange rates in a less developed country that has free-market-determined interest rates but does not have a forward exchange market. Is there any other way of inferring expected future exchange rates? Under what assumptions? expected rate of 8 currencies. 9. EXERCISES 2. a. Show that there is a direct relationship between the forward premium and the real interest rate differential between two b. Under what conditions will the forward premium equal the expected inflation" differential between two currencies? 3. Give four reasons why, when interest parity does not hold exactly, we are unable to take advantage of arbitrage to earn profits. 4. Suppose the 1-year interest rate on British pounds is 11%, the dollar interest rate is 6%, and the current spot rate $1.80. a. What do you expect the spot rate to be in 1 year? b. Why can we not observe the expected future spot rate? 5. Assume that the 1-year interest rate in the United States is 2% and the 1-year interest rate in Sweden is 4%. Is there a premium or discount on the Swedish krona? 6. If two countries had identical term structures of interest rates, what is the expected future exchange rate change between the two currencies? currencies. transaction controls, or political risk. 7. The real interest rate is equal to the nominal interest rate minus the If real interest rates are equal in two countries, then the interest rate differential will equal to expected inflation rate differential, which in turn will equal to the forward premium or discount between two The term structure of interest rates is the relationship between inter- est rates on various bonds with different terms to maturity. 10. Differences between the term structure of interest rates in two coun- tries will reflect the expected exchange rate changes. 1. Suppose you want to infer expected future exchange rates in a less developed country that has free-market-determined interest rates but does not have a forward exchange market. Is there any other way of inferring expected future exchange rates? Under what assumptions? expected rate of 8 currencies. 9. EXERCISES 2. a. Show that there is a direct relationship between the forward premium and the real interest rate differential between two b. Under what conditions will the forward premium equal the expected inflation" differential between two currencies? 3. Give four reasons why, when interest parity does not hold exactly, we are unable to take advantage of arbitrage to earn profits. 4. Suppose the 1-year interest rate on British pounds is 11%, the dollar interest rate is 6%, and the current spot rate $1.80. a. What do you expect the spot rate to be in 1 year? b. Why can we not observe the expected future spot rate? 5. Assume that the 1-year interest rate in the United States is 2% and the 1-year interest rate in Sweden is 4%. Is there a premium or discount on the Swedish krona? 6. If two countries had identical term structures of interest rates, what is the expected future exchange rate change between the two currencies? currencies