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On 20 April 2020, Fitch Ratings Inc. downgraded Hong Kong as an issuer of long-term, foreign currency debt because the city is facing a second

On 20 April 2020, Fitch Ratings Inc. downgraded Hong Kong as an issuer of long-term, foreign currency debt because the city is facing a "second major shock" from the coronavirus after prolonged social unrest last year. Fitch Ratings is an American credit rating agency and is one of the "Big Three credit rating agencies". Hong Kong therefore has bonds that bear greater risk than investments in other countries than before.

a. (1 Points) State the Adjusted Uncovered Interest Parity Condition.

b. (5 Points) Use diagrams showing the spot exchange rate, expected currency returns, and real money holdings to explain how the Hong Kong Monetary Authority (HKMA) might intervene in money markets in order to maintain the exchange rate that may have been affected by this credit downgrade.

c. (4 Points) Are there limitations to your proposed strategy? Explain your answer.

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