Question
4. Let Thailand be a home currency, the U.S. be a foreign currency, and the exchange rate is defined as units of home currency per
4. Let Thailand be a home currency, the U.S. be a foreign currency, and the exchange rate is defined as units of home currency per unit of foreign currency, iUS = interest in the U.S., iTH = interest rate in Thailand, St = spot rate at time t, and Ft = forward rate at time t. The investor has a choice to invest either in the U.S. or in Thailand.
4.1 Please write down the forward rate (Ft) as a function of spot rate (St) such that the relationship between Ft and St satisfies the interest rate parity condition.
4.2 Assuming that iUS = 2%, iTH = 5%, St = 30.69 THB/USD, what should be the forward rate (Ft) according to the interest rate parity condition?
4.3 What are critical assumptions behind the calculation of the forward rate (Ft) in Question# 4.2?
4.4 Assuming that iUS = 2%, iTH = 5%, St = 30.69 THB/USD, and Ft is quoted at 31.65 THB/USD, other things being equal, where should investors invest their money? Please explain.
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41 The interest rate parity condition states that the forward exchange rate Ft should be equal to the spot exchange rate St multiplied by the ratio of ...Get Instant Access to Expert-Tailored Solutions
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