Assume that you are a U.S. investor. The nominal return on a U.S. bond is 5% and the nominal return on a German bond is 6%. Both bonds mature in one year. The current exchange rate is 1.18 €/$. If uncovered exchange rate parity holds, you would expect the exchange rate a year from now to be €/$. (Round your response to two decimal places.) As a U.S. investor you exchange dollars for euros and purchase the German bond today. One year from now, it turns out that the exchange rate, E, is actually 0.98 (1 dollar = 0.98 euros). Your realized return in dollars is %. (Enter your response as a whole number.) Investing in the U.S. bond would have yielded %. (Enter your response as a whole number.) Are the differences in rates of return consistent with the uncovered interest rate parity condition? O A. Such differences in interest rates demonstrate that the uncovered interest parity does not hold. O B. Investors would never expect the currency to appreciate if it is going to depreciate in practice. O C. Such differences in interest rates are consistent with the uncovered interest parity. O D. Because uncovered interest parity holds, the example above is unrealistic.

Assume that you are a U.S. investor. The nominal return on a U.S. bond is 5% and the nominal return on a German bond is 6%. Both bonds mature in one year. The current exchange rate is 1.18 €/$. If uncovered exchange rate parity holds, you would expect the exchange rate a year from now to be €/$. (Round your response to two decimal places.) As a U.S. investor you exchange dollars for euros and purchase the German bond today. One year from now, it turns out that the exchange rate, E, is actually 0.98 (1 dollar = 0.98 euros). Your realized return in dollars is %. (Enter your response as a whole number.) Investing in the U.S. bond would have yielded %. (Enter your response as a whole number.) Are the differences in rates of return consistent with the uncovered interest rate parity condition? O A. Such differences in interest rates demonstrate that the uncovered interest parity does not hold. O B. Investors would never expect the currency to appreciate if it is going to depreciate in practice. O C. Such differences in interest rates are consistent with the uncovered interest parity. O D. Because uncovered interest parity holds, the example above is unrealistic.

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter7: International Arbitrage And Interest Rate Parity

Section: Chapter Questions

Problem 35QA

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