5 August, 05:07

# Assume that the current exchange rate between \$ and Russian Ruble is 30Rb/\$. The Russian Central Bank announces that Ruble will not get weaker than 40Rb/\$ during the next year. Assume that one-year Ruble interest rate is 10% and one-year \$ interest rate is 5%. Do you find the Central Bank's announcement credible? Explain. (Hint: What does Uncovered Interest Parity (UIP) suggest for the future spot rate?) (Show your calculations!)

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1. 5 August, 06:04
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The Central Bank's announcement is quite credible as the predicted future spot exchange rate is way below the announced rate of 40Rb/\$

Explanation:

Uncovered interest parity says that the one year Future spot rate (F) is linked to the spot exchange rate (S) in the following manner

F = S * (1 + ih) / (1+if)

ih and if are the interest rates in home country (Russia) and Foreign country (USA)

So, F = 30 * (1+0.1) / (1+0.05) = 31.43 Rb/\$

So, the Central Bank's announcement is quite credible as the predicted future spot exchange rate is way below the announced rate of 40Rb/\$