2. Consider an example of rate-of-returncalculation. Suppose that Foreign bank pays 10%annual interest rate in cF. Right now, the exchangerate is E = 2cH/cF. In one year, you expect theexchange will be 1.8cH/cF. You are now planningdepositing 100CH into a foreign bank accountusing the current exchange rate, wait one year,receive the interest from the bank, withdraw allmoney in the account, and exchange the moneyinto cH.2.a. Based on your expected exchange rate, notusing the simple rule, answer the exact foreignrate of return.2.b. Using the simple rule, answer the Foreign rateof return.

The rate of return on a foreign deposit consists of three components: the interest rate itself, the…

Answered: 2.a. Based on your expected exchange…

2.a. Based on your expected exchange rate, not using the simple rule, answer the exact foreign rate of return. 2.b. Using the simple rule, answer the Foreign rate of return.

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter29: Exchange Rates And International Capital Flows

Section: Chapter Questions

Problem 25CTQ: If a countrys currency is expected to appreciate in value, what would you think will be the impact...

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Question

2. Consider an example of rate-of-return
calculation. Suppose that Foreign bank pays 10%
annual interest rate in cF. Right now, the exchange
rate is E = 2cH/cF. In one year, you expect the
exchange will be 1.8cH/cF. You are now planning
depositing 100CH into a foreign bank account
using the current exchange rate, wait one year,
receive the interest from the bank, withdraw all
money in the account, and exchange the money
into cH.
2.a. Based on your expected exchange rate, not
using the simple rule, answer the exact foreign
rate of return.
2.b. Using the simple rule, answer the Foreign rate
of return.

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