Question

According to IFE (International Fischer Effect), how would U.S. and Switzerland nominal rates compare during the three year period prior to Jan 1985? If Swiss Air had access to capital markets both in the US and in Switzerland, how would you recommend Swiss Air to finance the planes given the nominal rates? Under what circumstances would Swiss Air benefit from financing in one market over the other?

Answer 1

The nominal rates between the U.S. and Switzerland would depend on their respective expected inflation rates. Swiss Air would benefit from financing in one market over the other depending on the relative nominal rates in each market.

Step-by-step explanation:

The International Fischer Effect (IFE) suggests that the difference in nominal interest rates between two countries is equal to the difference in their expected inflation rates. In order to compare the U.S. and Switzerland nominal rates, we need to consider the expected inflation rates for both countries. If the expected inflation rate in Switzerland is higher than in the U.S., then the nominal interest rate in Switzerland would be higher than in the U.S. Conversely, if the expected inflation rate in Switzerland is lower than in the U.S., then the nominal interest rate in Switzerland would be lower than in the U.S.

If Swiss Air had access to capital markets in both the U.S. and Switzerland, the decision on how to finance planes would depend on the nominal rates in each market. If the nominal rate in the U.S. is lower than in Switzerland, it would be more beneficial for Swiss Air to finance the planes in the U.S. market. On the other hand, if the nominal rate in Switzerland is lower than in the U.S., it would be more beneficial for Swiss Air to finance the planes in the Swiss market.

In summary, the nominal rates between the U.S. and Switzerland would depend on their respective expected inflation rates. Swiss Air would benefit from financing in one market over the other depending on the relative nominal rates in each market.