Question
Banks in Taiwan pay 11% on Jason deposits per annum. You are able to borrow at 5% in US dollars per annum. The current exchange
Banks in Taiwan pay 11% on Jason deposits per annum. You are able to borrow at 5% in US dollars per annum. The current exchange rate is 8 TWD/$, and the one year forward rate is TWD 8.5/$. You believe that the exchange rate will remain the same over the next year, and want to take advantage of the interest rate differential. Since you have a strong view on where the TWD/$ rate will be in a year, you are willing to take on FX risk.
1) Describe two distinct ways to implement investment strategies to take advantage of the interest rate differences between the two countries.
2) If you are correct and the TWD/$ rate remains the same over the next year, how much would you make per dollar borrowed?
3)If you are unable to open an account in Taiwan and lend at 11%, can you still implement your investment strategy? If the Jason depreciates to 10TWD/$, what will be the return to this strategy per dollar borrowed?
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