1. Evaluate the usefulness of relative PPP in predicting movements in foreign exchange rates on:
a. Short-term basis (for example, three months).
b. Long-term basis (for example, six years).
2. Suppose that the treasurer of IBM has an extra cash reserve of $100,000,000 to invest for six months. The six-month interest rate is 8 percent per annum in the United States and 7 percent per annum in Germany. Currently, the spot exchange rate is €1.01 per dollar and the six-month forward exchange rate is €0.99 per dollar. The treasurer of IBM does not wish to bear any exchange risk. Where should he or she invest to maximize the return?
