Below are the price of one Euro at the beginning of year and at the end of year.

a) Calculate the one year covered return for a U.S. investor buying a German Bond whose yield is 3% (Assume the investor bought the bond on January 1 and that interest rate remains constant through the year).

b) Calculate the one year uncovered return for the U.S. investor.

Spot Price 1 Yr Forward Price

1-Jan $1.82 $1.85 (seen on Jan 1)

31-Dec $1.95 $1.97 (seen on Dec 31)