Question

In: Economics

Suppose that the current spot rate between dollar and pound is 1.5 $/£, and the expected future spot rate in 12 months is 1.48 $/£.

Suppose that the current spot rate between dollar and pound is 1.5 $/£, and the expected future spot rate in 12 months is 1.48 $/£. If the 1-year interest rate of U.K. treasury bonds is 8%, then the net rate of return on the U.K. bond investment in terms of dollar (%) is roughly _________, according to the uncovered interest rate parity approximation.

Select one:

a. 9.35%

b. 8%

c. 6.67%

d. 3.35%

If Peru inflation is 6 % while the U.K. inflation is 2 % during the year. According to the relative purchasing power parity, which of the following statement is correct?

Select one:

a. Peruvian sol is expected to appreciate against U.K. pound.

b. Peruvian sol is expected to depreciate against U.K. pound.

c. There is no depreciation or appreciation between Peruvian sol and U.K. pound.

d. U.K. pound is expected to depreciate against Peruvian sol.

Suppose a U.S. investor purchases German 1-year government bonds with 1,000 U.S. dollars when the exchange rate is 0.92 euro per dollar. The German 1-year government bonds pay 5% interest per year. After one year the exchange rate equals 0.9 euro per dollar. What is the total $ return on the German investment at the end of year (round up to the nearest integer)?

Select one:

a. $1,050

b. $1,073

c. $966

d. $1,000

Solutions

Expert Solution

Answer

(a) spot exchange rate, $1.5= £1

suppose US investor invest $150 (or £100 in U.K.)

interest rate is 8%

return after one year = £108

after a year exchange rate $1.48 = £1

so use investor get $159.84(1.48*108)

rate of return =(159.84-150)*100/150

rate of return =9.84*100/150

rate of return =984/150

rate of return =6.56%

so option C is correct

(b)According to Relative purchasing power parity(RPPP) country with a higher inflation rate will have devalued currency.

So Peruvian sol is expected to depreciate against U.K. pound

so option B is correct

(c) US investor invest =$1000

the exchange rate is 0.92euro =$1

so US investor invests = 920 euro (0.92*1000)

rate of return is 5%

so after one-year investor gets = 920 + 5% of 920

after one-year investor gets =920+(920*5)/100

one-year investor gets=920+46

one-year investor gets= euro 966

and exchange rate is 0.90 euro = $1

so return on german bond is $1073.33 (966/0.90)

so option B is correct


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