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Consider the following data. Suppose the expected exchange rates are the average expectations by investors for exchange rates in one year. Imagine that the

 

 


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Consider the following data. Suppose the expected exchange rates are the average expectations by investors for exchange rates in one year. Imagine that the interest rates are for equally risky assets and are annual rates. US Spot Rate Expected Exchange Rate Current Interest Rate 2% Australia Singapore 1.80 AS/U$ 1.75 SS/U$ 1.90 AS/U$ 1.65 S$/U$ 4% 1% A. Calculate the rate of return for a U.S. dollar investment? B. (i). Calculate the rate of return for a U.S. dollar investor investing in the Australian deposit? (ii). what part of the rate of return arises only due to the interest earned on the Australia deposit? (iii). What part of the rate of return arises from the percentage change in the value of the principal is due to the change in the exchange rate? iv) What component of the rate of return arises from the percentage change in the value of the interest payment is due to the change in the exchange rate?

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