Question
Suppose you have lending interest rate data and exchange rate data for periods t through period t + h (take the largest period that has
Suppose you have lending interest rate data and exchange rate data for periods t through period t + h (take the largest period that has data for both series). In period t, a lender starts with one unit of the currency. He or she lends it out during that period and receives the principal plus interest at the beginning of the next period. Graph how the value of the investment evolves over time as both the principal and interest accrues from time t to time h-1. Hint: at the beginning of t+1 the value of the investment is: 1+it , at the beginning of period t+2: (1 + it) (1 + it+1), and at the beginning of period h: (1 + it) (1 + it+1)...(1 + it+h1).
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