You are an investor in the US, thinking about investing 500.000 USD. Numbers say that the...

You are an investor in the US, thinking about investing 500.000 USD. Numbers say that the nominal interest rate for one year on USD assets is 2%, while in Norway the interest rate is 2,8%. Forecasts estimate that in Norway the inflation is going to be 2,1% during the next year, while in the US 1,1% inflation is expected. The USD/EUR exchange rate is 1,08. Market analysts say that during the next year the USD is expected to appreciate by 0,9% agains the EUR.

What is the reasonable choice with respect to investment? Which currency should be invested in? How can the profit from this situation be maximized?

Expert Solution

Question: you are investor in US, thinking about investing 500.000 USD. Numbers say that nominal interest rate for one year in USD asset is 2%, while in Norway interest rate is 2.8% , forcast estimate that the inflation in Norway is going to be 2.1% during the next year, while in the US 1.1% inflation is expected. The USD/ EUR exchange rate is 1.08 market analyst say that the USD is expected to appreciate by0. 9% against the EUR.

What is the reasonable choice with respect to investment? What currency should be invested in? How can the profit maximised in this situation?

Given: Investment = 500.000 USD

USD nominal interest rate= 2%

USD inflation = 1.1 %

Real interest rate = nominal interest rate - Inflation

Putting the value of inflation and the nominal interest rate we get real interest rate

2-1.1= 0.9 % for USD

For Norway,

Inflation= 2.1% , nominal interest rate = 2.8

So applying the formula we get real interest rate

2.8 -2. 1 = 0.7

As there is negative relationship between rate of interest and inflation so for Norway rate of interest is 0.7 % and to USD it is 0.9% so it is beneficial to invest in Norway currency as the rate of interest is low and for USD it is not beneficial to invest in this currency because rate of interest is 0.9% which is more than Norway rate of interest and profit will be maximised by investing in Norway because as investment increases than profit will also increase in Norway

Rahul Sunny answered 7 months ago

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