finance

My currency/country = Euro

1. Fisher Effect 

1) Check the money market rate (one year government security) of US$ and your 

currency at two time points - beginning of year 2013 and 2014. Make comparison. 

2) Find the inflation rates of US and your country in year 2013 and 2014. Make 

comparison. 

3) Use the above information to test Fisher Effect for both year 2013-2014 and year 

2014-2015 periods, for both US and your country. 

Note: Fisher Effect explains relationship between normal interest rate, real interest 

rate and inflation. 1 + i$ = (1 + $ ) × E(1 + $) 

2. International Fisher Effect. Use above information and the information from Part I 

question 6 to test International Fisher Effect. Does it hold for year 2013-2014 and year 

2014-2015 periods? 

Note: International Fisher Effect explains relationship of relative interest rate and relative 

inflation rate between two countries. 

3. Purchase Power Parity 

Use information from question 1 and question 6 in part I to check with Purchase Power 

Parity (relative PPP in particular) holds. 

Note: Relative PPP states that the rate of change in the exchange rate is equal to 

differences in the rates of inflation. 

4. Forward Rate and Interest Rate Parity 

1) Does forward market exist on your currency against US Dollar and/or other major 

currencies? Find the one year forward rate at the beginning of year 2013 and 

2014. 

2) Compute the difference between forward rate and spot rate. Is it a premium or 

discount at the beginning of year 2013 and 2014? 

3) Use above results and information from question 1 to check if interest rate parity 

holds for year 2013 and 2014. 

4) Can you identify any arbitrage opportunity? Note: Interest Rate Parity explains 

relationship of relative interest rate and the forward premium or discount.

1. Decide whether you would do business in that country/region you have been 

investigating

(separate one group into two teams to debate on which of the two countries/regions to

invest).

2. What business to do, what mode/approach (foreign currency investment, trade, 

production,

franchising/licensing, joint venture, M&A, direct investment, portfolio investment …), 

why?

a) You can invest (buy and sell, long or short) in currency. You then have to analyze and

forecast the trends of exchange rate in 1 to 5 year, whatever horizon of investment you

feel comfortable with.

b) You can invest in the aggregate economy by buying country specific fund/index. You

have to find or create one.

c) You can conduct the traditional import export business. You then have to identify what

industry sector and product/service to trade.

d) You can build your own production/service facility or franchise/license your 

brand/trade mark and operation know-how.

e) You can choose joint venture or wholly owned subsidiary. You can make greenfield

development or M&As. You have to identify product/service and partner/target.

f) You can invest in individual company stocks, industry ETFs, bonds, derivatives or

alternative markets. You have to pick specific one, analyze and justify it.

add graphs and charts to some questions when answering.