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6. The one-year interest rate on Swiss bonds is 5 percent, and the interest rate on U.S. bonds is 2 percent. a) If your classmate,
6. The one-year interest rate on Swiss bonds is 5 percent, and the interest rate on U.S. bonds is 2 percent. a) If your classmate, Rey, believes that the dollar will appreciate by 3.2 percent in the coming year, which country would she invest in? Explain your answer. b) If the current spot exchange rate is $1.09 per Swiss franc, and you believe that the uncovered interest rate parity holds in the market, what would you expect the spot rate to be in one year? Explain. c) If a change in U.S. monetary policy leads investors to believe that the expected spot exchange rate in a year will be $1.08 per Swiss franc, what would happen to the current spot exchange rate? Show your calculation and explain your answer using the FX market diagram (with domestic returns and expected foreign returns) we used in class. d) (Continue from part c). What would happen to the percentage change in the exchange rate over the one-year period? Show your calculation. Also, draw the time path of the exchange rate over the period. 6. The one-year interest rate on Swiss bonds is 5 percent, and the interest rate on U.S. bonds is 2 percent. a) If your classmate, Rey, believes that the dollar will appreciate by 3.2 percent in the coming year, which country would she invest in? Explain your answer. b) If the current spot exchange rate is $1.09 per Swiss franc, and you believe that the uncovered interest rate parity holds in the market, what would you expect the spot rate to be in one year? Explain. c) If a change in U.S. monetary policy leads investors to believe that the expected spot exchange rate in a year will be $1.08 per Swiss franc, what would happen to the current spot exchange rate? Show your calculation and explain your answer using the FX market diagram (with domestic returns and expected foreign returns) we used in class. d) (Continue from part c). What would happen to the percentage change in the exchange rate over the one-year period? Show your calculation. Also, draw the time path of the exchange rate over the period
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