Solve the question given in the picture. Consider the following formula£/$Et st+1where St£/$St = if — it,£/$ is the logarithm of the nominal exchange rate in period t definedas pounds per dollar, it is the short term interest rate in the UK and it is theshort term interest rate in the US. 3) If pt is positive, a risk neutral investor (investor who doesn't care aboutrisk) willa) Borrow in the UK and invest in the USb) Borrow in the US and invest in the UKc) Insufficient information to answer the question4) If pt is negative, a risk averse investor (investor who cares about risk) willa) Borrow in the UK and invest in the USb) Borrow in the US and invest in the UKc) Insufficient information to answer the question

The currency risk premium refers to the additional return which investors requires when they are…

Consider the following formula £/$ Et st+1 £/$ £/$ St = if — it, - where st is the logarithm of the nominal exchange rate in period t defined as pounds per dollar, if is the short term interest rate in the UK and it is the short term interest rate in the US.

Consider the following formula £/$ Et st+1 £/$ £/$ St = if — it, - where st is the logarithm of the nominal exchange rate in period t defined as pounds per dollar, if is the short term interest rate in the UK and it is the short term interest rate in the US.

Macroeconomics

13th Edition

ISBN:9781337617390

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter22: International Finance

Section: Chapter Questions

Problem 10QP

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Question

Solve the question given in the picture.

Consider the following formula
£/$
Et st+1
where St
£/$
St = if — it,
£/$ is the logarithm of the nominal exchange rate in period t defined
as pounds per dollar, it is the short term interest rate in the UK and it is the
short term interest rate in the US.

3) If pt is positive, a risk neutral investor (investor who doesn't care about
risk) will
a) Borrow in the UK and invest in the US
b) Borrow in the US and invest in the UK
c) Insufficient information to answer the question
4) If pt is negative, a risk averse investor (investor who cares about risk) will
a) Borrow in the UK and invest in the US
b) Borrow in the US and invest in the UK
c) Insufficient information to answer the question

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