Question

Nominal interest rates in Cyprus are 7%, while nominal interest rates in the U.S. are 5%. The spot rate for the Cyprus pound (CYP) is $1.50. According to the international Fisher effect (IFE), the Cyprus pound should adjust to a new level of:

Answer 1

$1.47

Step-by-step explanation:

Interest rate in foreign currency if=7%

Interest rate in local currency ih=5%

Spot rate (So)-dollars per unit of foreign currency=$1.5

Change in foregin currency exchange rate ef=((1+ih)/(1+if))-1

ef=(1+.05/1+.07)-1=-1.86%

Future spot rate (St)=So(1+ef)=1.5(1-.0186)=$1.47