Question
Investors based in the United States can earn 12 percent interest on a one-year bank deposit in Argentina (with no default risk) or 1 percent
Investors based in the United States can earn 12 percent interest on a one-year bank deposit in Argentina (with no default risk) or 1 percent on a one-year bank deposit in the United States (with no default risk). Assess the following statement: "According to the international Fisher effect (IFE), if U.S. investors invest 1,000 Argentine pesos in an Argentine bank deposit, they are expected to receive only 10 pesos (1% 1,000 pesos) as interest." Is this statement a correct explanation of why the international Fisher effect would discourage U.S. investors from investing in Argentina? If not, provide a more accurate explanation for why investors who believe in IFE would not pursue the Argentine investment in this example. (Select option 1, 2 or 3)
- If U.S. investors invest 1,000 Argentine pesos in an Argentine bank deposit, they are expected to receive 120 pesos (12% 1,000 pesos) as interest. However, investors who believe in IFE would not pursue the Argentine investment because the effect of the Argentine peso's appreciation will offset the interest rate advantage.
- The international Fisher effect would discourage U.S. investors from investing in Argentina because if U.S. investors invest 1,000 Argentine pesos in an Argentine bank deposit, they are expected to receive 10 pesos (1% 1,000 pesos) as interest.
- If U.S. investors invest 1,000 Argentine pesos in an Argentine bank deposit, they are expected to receive 120 pesos (12% 1,000 pesos) as interest. However, investors who believe in IFE would not pursue the Argentine investment because the effect of the Argentine peso's depreciation will offset the interest rate advantage.
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