1) For each problem, assume that there are only two countries in the world. The US is Home, and ROW (rest of the world, treated ass one country( is foreign. Assume floating exchange rates, and use norminal not reat interest rates. (show the equations you use and how you plug in variable values for partial credit.)
a) es=$1.30 i*=0.05 i=0.01
US firm BS, a speculator, insists that it can make a large return by investing in foreign bonds. what must BS's expectations be about the future value of the foreign currency? (provide a mathematical solution).
b) ef=$0.55 es=$0.60 i*=0.05 i=0.04
A novice US financial firm LB, which is risk-averse, believes that it can make a high return by investing in foreign bonds due to high interest rates there. What must you (the more experianced advisor) explain to LB?
1) For each problem, assume that there are only two countries in the world. The US is Home, and ROW (rest of the world, treated ass one country( is foreign. Assume floating exchange rates, and use norminal not reat interest rates. (show the equations you use and how you plug in variable values for partial credit.)
a) es=$1.30 i*=0.05 i=0.01
US firm BS, a speculator, insists that it can make a large return by investing in foreign bonds. what must BS's expectations be about the future value of the foreign currency? (provide a mathematical solution).
b) ef=$0.55 es=$0.60 i*=0.05 i=0.04
A novice US financial firm LB, which is risk-averse, believes that it can make a high return by investing in foreign bonds due to high interest rates there. What must you (the more experianced advisor) explain to LB?
