1.The following conditions exist in the foreign exchange market:

Current spot rate: 1122 Korean won / U.S. $

Annualized interest rate on 90-day dollar-denominated bonds: 2%

Annualized interest rate on 90-day won-denominated bonds: 8%

All financial investors expect the spot exchange rate to be 1200 Korean won / U.S. $ in 90 days.

a.If a U.S. investor bases decisions solely on the expected rate of return, should that investor buy won-denominated bonds or dollar-denominated bonds? Briefly explain.

b.If a South Korean investor bases decisions solely on the expected rate of return, should that investor buy won-denominated bonds or dollar-denominated bonds? Briefly explain.

c.If these two investors' decisions are typical of other investors in the U.S. and South Korea, what pressure is placed on the current spot exchange rate? Which currency will depreciate and which one will appreciate?