The interest rate on one-year risk-free bonds is 5.25 percent in the South Africa and 3.75 percent in the Netherlands. The current exchange rate is ZAR0.058 per Euro. Suppose that you are a SA investor and you expect the Euro to depreciate by 2.7 percent over the next year.

a. Calculate the foreign currency risk premium. (5 marks)

b. Calculate the domestic currency return on the foreign bond, assuming that your currency appreciation expectations are met. Provide calculations starting with the domestics risk free rate as well as the foreign risk free rate. (Note: do not forget to give me both calculations) (4 Marks)

c. Has the investors attempt to gain a return higher than the domestic risk free rate succeeded? Explain why the attempt succeeded/failed. (Hint: When we assess the success of an investment we always compare the return to a benchmark rate) (4 Marks)