One-year interest rates are currently 3.30% in the United States and 2.60% in "Euroland". The current spot rate between the euro and dollar is $1.3225/euro. What is the expected spot rate in one year if the international Fisher effect holds?

Question

Quizplus · Accepted Answer

The international Fisher effect states that the expected change in the spot rate between two currencies is equal to the difference in their interest rates. In this case, the expected change in the spot rate is:(1 + 3.30%) / (1 + 2.60%) - 1 = 0.68%This means that the expected spot rate in one year is:$1.3225/euro * (1 + 0.68%) = $1.3315/euro

One-Year Interest Rates Are Currently 3