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Example 2: An investor in her home currency wud like to expand her portfolio to include 1 yr bonds in foreign countries. The expected inflation in DC is 3 %, in Fc is 1pc. inflation rates are totally predictable over next year. Exchange rate b/w 2 countries is currently 2 DC units per FC unit. The price level of consumption basket in domestic country relative to foreign country is 2 is to 1. The real exchange rate is 1 to 1. the 1 year interest rate is 5pc flor DC and 3pc for FC. Investor expects real exchange rate to remain constant over time.
Q What are the expected exchange rate & expected return on the foreign bond in domestic currency.
Please help out with second part(expected return on foreign bond)..I am unable to understand the solution provided by CFAI. |
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发表于 2011-7-13 13:54
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