International Risk and Return
1–2 pages
You are asked to help put together a training program describing the effects of exchange rates to training participants at Axetem. Your training material is to address the following:
Explain the Fisher effect and its mechanics by walking the trainees through a step-by-step explanation in the following hypothetical situation:
- If the real interest rate is 5%, the U.S. inflation rate is at 3%, and the inflation rate of the euro area (the countries that use the euro) is at 4%, what are the nominal interest rates for both the United States and the euro area? Interpret the calculation for your trainees.
- What are at least 3 implications of exchange rate fluctuations for Axetem as they relate to marketing and production decisions?
Solution Preview
International Risk and Return
In any company that has operations in different countries or abroad, it is imperative that all individuals within the company re conversant with the various effects that may affect the business due to changes in exchange rates. To understand the impact of fluctuation of exchange rates, one needs to have an understanding of the international Fisher effect also referred by many as the Fisher’s Open Hypothesis.
(475 words)