Go to cmegroup.com to obtain the current (making sure to include the date you select) futures price for the RMB and calculate (use the annual percentage formula) whether the RMB is currently trading at a discount or at a premium to the USD. Make sure to include the specific maturity date of the futures contract you select (try to find one with a maturity date of approximately one year from now).
Go to a source to obtain the one year/annual inflation rate, AND the one year/annual government interest rate for BOTH China and for the U.S. Please make sure to reference your source and the date you obtained the data! It might also be helpful to look at a source (such as trading economics.com) that allow you to observe trends in both the inflation rate and the interest rate for each country over the past few years. Feel free to include graphs of any of the data you include as that makes it easier to discern and discuss trends in your numbers.
To recognize the relationship between interest rates (questions #1 and #2) and inflation rates (#3 and #4) and the forward/futures RMB/USD discount or premium, we will make the necessary calculations to determine if Interest Rate Parity exists, AND if Purchasing Power Parity exists, currently between the RMB and the USD.
Question 1 – What is the difference between the annualized interest rate of China versus the annual interest rate in the US?
According to interest rate parity, a foreign currency with a higher interest rate should have a discount in its futures price. Does that relationship exist here?
Question 2 – Use the interest rate parity formula to determine how the magnitude of the forward (or futures) premium or discount compares to the interest rate differential between the two countries. Show all your calculations and discuss your result (that is, how it shows/does not show that interest rate parity holds here?).
Question 3 – What is the difference between the annualized inflation rate of China versus the annual interest rate in the US? According to purchasing power parity, a foreign currency with a higher inflation rate should have a discount in its futures price. Does that relationship exist here?
Question 4 – Use the purchasing power parity formula to determine how the magnitude of the forward (or futures) premium or discount compares to the inflation rate differential between the two countries. Show all your calculations and Discuss your result (that is, how it shows/does not show that purchasing power parity holds here?).
