Assume U.S. and Swiss investors require a real rate of return of 3%. Assume the nominal U.S. interest rate is 6% and the nominal Swiss rate is 4%. According to the international Fisher effect, the franc will ____ by about ____.

Question

Quizplus · Accepted Answer

The international Fisher effect states that the expected change in the exchange rate between two currencies is equal to the difference in their nominal interest rates minus the difference in their real interest rates. In this case, the nominal U.S. interest rate is 6% and the nominal Swiss rate is 4%, so the difference in their nominal interest rates is 2%. The real interest rate in both countries is 3%, so the difference in their real interest rates is 0%. Therefore, the expected change in the exchange rate is 2% - 0% = 2%. This means that the franc is expected to appreciate by about 2%.

Assume US and Swiss Investors Require a Real Rate of Return