Question 2

The interest parity condition states: iUs= iChina-E^e- E/E

In the formula, iUS and IChina are the interest rates of bonds in the U.S and China, respectively. E is exchange rate expressed as E=Chinese Yuan/1 US dollar and E^e is investor's expected exchange rate.

2.1 Suppose the interest rate in U.S is 3 percentage points higher than interest rate in China (that is to say iUS-iChina=3%=0.03). and if an investor expects dollar to appreciate by 5%, that is E^e will be five percent higher than E. Should this invester buy U.S. bond or Chinese bond now and why? show steps

2.2 continued of 2.1 if the interest rate in U.S. is 3 percentage points higher than interest rate in China. Under what condition should the investor buy CHinese bond? show steps