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1. Consider the following prices for government bonds and foreign exchange in Canada and the United States. Assume that both government securities are one-year bonds,
1. Consider the following prices for government bonds and foreign exchange in Canada and the United States. Assume that both government securities are one-year bonds, paying the face value of the bond one year from now. The exchange rate E stands at US$1 = C$0.95. The face value and prices of the two bonds are given by: Face Value Price 1- ear bond C$10,000 C$9.615.38 United States US$13,333 US$12,698.10 a. Compute the normal interest rate on each of the bonds. b. Compute the expected exchange rate next year consistent with uncovered interest parity. c. If you expect the Canadian dollar to depreciate relative to the American dollar, which bond should you buy? (1. Assume you are a Canadian investor. You exchange your dollars for US dollars and purchase the American bond. One year from now, it turns out E is actually 0.90 (US$1 = C3090). 'What is your realized return in Canadian dollars compared with the realized return you would have made had you held the Canadian dollar bond? e. Are the differences in return in (d) consistent with the uncovered interest parity condition? Why, or why not
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