Do all Parts.
1.a 1.b Interest rate for 10-year US government bonds is 3.145%, and for similar bonds in China, let it be 6.854% Assume there is no risk difference between the two currencies. According to the interest rate parity model, the expected % change in the exchange rate of the Chinese Yuan to the US $ (Dollar price of Yuan) over 10 years is of the Chinese currency, but also its Such a change represents a long-term immediate (Write "D" for Devaluation, "R" for Revaluation, and "N" for No Change.) Now assume interest rate parity does not hold, and that So the left and right hand sides differ by 1.0% + R> R + (EE. \/E SA SA $/ $ This would mean that currency traders could make an expected 1% profit by taking their money out of and lending to borrowers in This currency trading also ("Y" for Yuan, "D" for Dollars) and thus ("Y" for Yuan, "D" for Dollars) the curent exchange rate, E "D" for Decreases.) the Yuan relative to Dollar. $/X (Write "D" for Devaluing "R", for Revaluing.) EEZE 10 11 12 13 HELARE2 14 15 16 17 18 19 20 21 22 23 24 25 26 E F G H J L M R > R $ V Now assume interest rate parity does not hold, and that + (E- E /E So the left and right hand sides differ by 1.0% $/* $/* This would mean that currency traders could make an expected 1% profit by taking their money out of $/4 and lending to borrowers in This currency trading also ("Y" for Yuan, "D" for Dollars) the curent exchange rate, E ("Y" for Yuan, "D" for Dollars) and thus the Yuan relative to Dollar. S/ (Write "1" for Increases, "D" for Decreases.) (Write "D" for Devaluing "R", for Revaluing.) 1.c Let's say that the above is now: R>R $ + (FE)/E, where note that the first E on the right has been replaced $/ S/S/* 1 where t inequality may (or may not) have been reversed. with an F for a future transaction, Let's say that the two sides differ by only 0.01%. This means that by arbitrage, currency traders can guarantee themselves a risk-free profit by borrowing in and lending in ("Y" for Yuan, "D" for Dollars) the curent exchange rate, E ("Y" for Yuan, "D" for Dollars) and thus This trade will have the effect of Yuan to Dollar. S/* (Write "I" for Increasing, "D" for Decreasing.) (Write "D" for Devaluing "R", for Revaluing.) 1.b K 1.a 1.b Interest rate for 10-year US government bonds is 3.145%, and for similar bonds in China, let it be 6.854% Assume there is no risk difference between the two currencies. According to the interest rate parity model, the expected % change in the exchange rate of the Chinese Yuan to the US $ (Dollar price of Yuan) over 10 years is of the Chinese currency, but also its Such a change represents a long-term immediate (Write "D" for Devaluation, "R" for Revaluation, and "N" for No Change.) Now assume interest rate parity does not hold, and that So the left and right hand sides differ by 1.0% + R> R + (EE. \/E SA SA $/ $ This would mean that currency traders could make an expected 1% profit by taking their money out of and lending to borrowers in This currency trading also ("Y" for Yuan, "D" for Dollars) and thus ("Y" for Yuan, "D" for Dollars) the curent exchange rate, E "D" for Decreases.) the Yuan relative to Dollar. $/X (Write "D" for Devaluing "R", for Revaluing.) EEZE 10 11 12 13 HELARE2 14 15 16 17 18 19 20 21 22 23 24 25 26 E F G H J L M R > R $ V Now assume interest rate parity does not hold, and that + (E- E /E So the left and right hand sides differ by 1.0% $/* $/* This would mean that currency traders could make an expected 1% profit by taking their money out of $/4 and lending to borrowers in This currency trading also ("Y" for Yuan, "D" for Dollars) the curent exchange rate, E ("Y" for Yuan, "D" for Dollars) and thus the Yuan relative to Dollar. S/ (Write "1" for Increases, "D" for Decreases.) (Write "D" for Devaluing "R", for Revaluing.) 1.c Let's say that the above is now: R>R $ + (FE)/E, where note that the first E on the right has been replaced $/ S/S/* 1 where t inequality may (or may not) have been reversed. with an F for a future transaction, Let's say that the two sides differ by only 0.01%. This means that by arbitrage, currency traders can guarantee themselves a risk-free profit by borrowing in and lending in ("Y" for Yuan, "D" for Dollars) the curent exchange rate, E ("Y" for Yuan, "D" for Dollars) and thus This trade will have the effect of Yuan to Dollar. S/* (Write "I" for Increasing, "D" for Decreasing.) (Write "D" for Devaluing "R", for Revaluing.) 1.b K
