The interest rate on a one year security in the United States is 3%,while the interest rate on a one year security in German is 8%.If the current exchange rate is 1 EURO = $1.50,then the future exchange rate in one year,according to the international Fisher effect,is
A) $1.431.
B) $1.425.
C) $1.575.
D) $1.385.

Question

Quizplus · Accepted Answer

According to the International Fisher Effect, the expected change in exchange rates between two countries is approximately equal to the difference in their nominal interest rates. The formula is: (1 + interest rate in US) / (1 + interest rate in Germany) = future exchange rate / current exchange rate. Plugging in the values: (1 + 0.03) / (1 + 0.08) = future exchange rate / 1.50, solving gives future exchange rate ≈ $1.431.

The Interest Rate on a One Year Security in the United