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LOS f: Calculate the expected (1) exchange rate and (2) domestic-currency holding period return on a foreign bond (security), given expected, predictable inflation rates, the beginning-of-period nominal exchange rate, and the constant real exchange rate.
Q1. A U.S. investor is considering investing in Swiss bonds. The $/SF (SF = Swiss Franc) exchange rate is 2. Inflation, which is completely predictable, is 5% and 3% in the U.S. and Switzerland, respectively. Current U.S. interest rates are 7% and Swiss interest rates are 5%. If the real exchange rate is constant, what is the domestic currency return from buying the Swiss bond?
A) 7%.
B) 3%.
C) 5%.
Q2. A Korean investor (currency = won) is considering the purchase of a U.S. bond. The current exchange rate is 100 (won to $). Korean inflation is 1% and U.S. inflation is 5%. Interest rates in Korea are 4% and in the U.S. are 8%. Assuming that the real rate remains constant, what is the domestic currency return from the purchase of the U.S. bond?
A) 3%.
B) 12%.
C) 4%.
Q3. A U.K. investor is considering the purchase of a Japanese bond. The current exchange rate is 150 (yen to pounds). The real rate is assumed to be constant. Inflation in Japan is 0% and interest rates are 2%. U.K. inflation is 3% and interest rates are 5%. What is the domestic currency return to the purchase of the Japanese bond?
A) 5%.
B) 3%.
C) 2%. | 
发表于 2009-4-2 13:49
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