Question
AssumethatyouareaU.S.investor.ThenominalreturnonaU.S.bondis%andthenominalreturnonaGermanbondis%.Bothbondsmatureinoneyear.Thecurrentexchangerateis/ $. 3 91.25 Ifuncoveredexchangerateparityholds,youwouldexpecttheexchangerateayearfromnowtobe/ $. ( Roundyourresponsetotwodecimalplaces. ) AsaU.S.investoryouexchangedollarsforeurosandpurchasetheGermanbondtoday.Oneyearfromnow,itturnsoutthattheexchangerate, E ,isactually(1dollar=euros).0.990.99 Yourrealizedreturnindollarsis%.( Enteryourresponseasawholenumber. ) InvestingintheU.S.bondwouldhaveyielded%.( Enteryourresponseasawholenumber. ) Arethedifferencesinratesofreturnconsistentwiththeuncoveredinterestrateparitycondition? A. Investorswouldneverexpectthecurrencytoappreciateifitisgoingtodepreciateinpractice. B. Because uncoveredinterestparityholds,theexampleaboveisunrealistic. C.
AssumethatyouareaU.S.investor.ThenominalreturnonaU.S.bondis%andthenominalreturnonaGermanbondis%.Bothbondsmatureinoneyear.Thecurrentexchangerateis/ $. 3 91.25 Ifuncoveredexchangerateparityholds,youwouldexpecttheexchangerateayearfromnowtobe/ $. ( Roundyourresponsetotwodecimalplaces. ) AsaU.S.investoryouexchangedollarsforeurosandpurchasetheGermanbondtoday.Oneyearfromnow,itturnsoutthattheexchangerate, E ,isactually(1dollar=euros).0.990.99 Yourrealizedreturnindollarsis%.( Enteryourresponseasawholenumber. ) InvestingintheU.S.bondwouldhaveyielded%.( Enteryourresponseasawholenumber. ) Arethedifferencesinratesofreturnconsistentwiththeuncoveredinterestrateparitycondition? A. Investorswouldneverexpectthecurrencytoappreciateifitisgoingtodepreciateinpractice. B. Because uncoveredinterestparityholds,theexampleaboveisunrealistic. C. Suchdifferencesininterestratesareconsistentwiththeuncoveredinterestparity. D. Suchdifferencesininterestratesdemonstratethattheuncoveredinterest
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