Q3:

You have just finished an undergraduate degree in Economics from the Omega University, and you are currently working at J.P. Morgan as an economic analyst. You have been contacted by Dr. Zeus, an American client who is interesting in investing in Canadian Treasury Bonds and seeks your advice. You have been given the following information:

1. Domestic Environment U.S. and Foreign Environment Canada.

2. The Current Spot Exchange Rate is $1 USD = $1.35 CDN.

3. The Current one-year interest rate on the Canadian Treasury Bonds is 5%.

4. The Current one-year interest on a U.S. Bonds is 4%.

1. Assume that interest rates remain unchanged, what do you expect the exchange rate to be in each of the next five years for U.S. and Canada respectively?

2. What is the five-year percentage rate of Appreciation or Depreciation of the Canadian and the American dollar respectively would be?

3. How would you protect your Currency from Depreciation and Inflation pressure if you were the Central Bank Governor?

4. Analytically Discuss the J Curve?