1 International Finance Project Part II 1. Fisher Effect 1) Check the money market rate (one yeargovernment security) of US$ and your currency in year 2014 and 2015. Make comparison.2) Find the inflation rates of US and your country in year 2014 and 2015. Make comparison. 3) Use theabove information to test Fisher Effect for both year 2014 and year 2015.Note: Fisher Effect explains relationship between normal interest rate, real interest rate and expectedinflation. 1 + i$ = (1 + $ ) Ã E(1 + $)2. Relative PPP. Use information in 1.1 and he information from Part I question 5-2 to test relativepurchase power parity. Does it hold for year 2014 and year 2015? Note: Relative PPP states that the rateof change in the exchange rate is equal to differences in the rates of inflation.3. International Fisher Effect. Use above information and the information from Part I question 5-2 to testInternational Fisher Effect. Does it hold for year 2014 and year 2015?Note: The relationship between the percentage change in the spot exchange rate over time and thedifferential between comparable interest rates in different national capital markets is known as theinternational Fisher effect4. Forward Rate and Interest Rate Parity 1) Does forward market exist on your currency against US Dollarand/or other major currencies? Find the one year forward rate at the beginning of year 2014 and 2015.2) Compute the difference between forward rate and spot rate. Is it a premium or discount at thebeginning of year 2014 and 2015? 3) Use above results and information from question 1 to check ifinterest rate parity holds for year 2014 and 2015.Note: Interest Rate Parity explains relationship of relative interest rate and the forward premium ordiscount.5. Future and Option. Does future or option market exist for your currency? Please provide one exampleof a future or option quote.
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