1 Theory and Empirics of Interest Parity
State the uncovered and the covered interst parity conditions.
1. Why is uncovered interest parity called uncovered? Does it have to hold? what assumptions are needed? How does it compare to covered interest parity?
2. The USD 3-month deposit (interest) rate and the GBP 3-month deposit rate are both 5.0%. What is the relationship between the current equilibrium USD/GBP exchange rate and its expected future level? Assume the expected USD/GBP exchange rate three months into the future remains constant at USD 1.50 per GBP. But the GBP 3-month deposit rate doubles to 10.0%. What is the new spot USD/GBP exchange rate in equilibrium.
3. Plot the difference between USA 3-Month Euro-dollar deposit rate and the UK 3-monthEuro-sterling deposit rate from January 2000 to December 2008. What do you observe?Now plot the expected exchange rate change at the three month horizon for the USD/GBP exchange rate, assuming that investors have perfect foresight so that the expected exchange rate equals the future realized spot rate. Does Uncovered Interest Parity seem to be satisfied in the data? Describe the steps you would have to take to check for covered interest parity in the data?
Data.
Please visit the Bank of England website:https://goo.gl/Gyte6z in order to downloadthe end of month USD/GBP spot exchange rate (symbol: XUMLUSS),the end of month 3-month Euro-sterling deposit rate (symbol: IUMES3A), the end of month 3-month Euro-dollar deposit rate (symbol: IUMED3A), and the end of month USD/GBP 3-month Forward Rate (symbol: XUMLDS3). The deposit rates should be under “Overseas currency deposit rates (3 months)” in the “Wholesale interest and discount rates” category. The spot exchange rate can be found under the “Spot exchange rates” category. Be sure to select “against the sterling” header. The forward rate can be found under the “Sterling against US dollar forward rates”category. After you have made your selection click “ShowData”, which will lead you to a page so that you can download the data series in Excel format.
Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.
You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.
Read moreEach paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.
Read moreThanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.
Read moreYour email is safe, as we store it according to international data protection rules. Your bank details are secure, as we use only reliable payment systems.
Read moreBy sending us your money, you buy the service we provide. Check out our terms and conditions if you prefer business talks to be laid out in official language.
Read more