Logic behind IFE Investors based in the United States can earn 11 percent interest on a one-year bank deposit in Argentina (with no default risk) or 2 percent on a one-year bank deposit in the United States (with no default risk). Assess the following statement: "According to the international Fisher effect (IFE), if U.S. investors invest 1,000 Argentine pesos in an Argentine bank deposit, they are expected to receive only 20 pesos ( 2 % × 1 , 000 pesos) as interest." Is this statement a correct explanation of why the international Fisher effect would discourage U.S. investors from investing in Argentina? If not, provide a more accurate explanation for why investors who believe in IFE would not pursue the Argentine investment in this example.

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 8, Problem 46QA
Textbook Problem

Logic behind IFE Investors based in the United States can earn 11 percent interest on a one-year bank deposit in Argentina (with no default risk) or 2 percent on a one-year bank deposit in the United States (with no default risk). Assess the following statement: "According to the international Fisher effect (IFE), if U.S. investors invest 1,000 Argentine pesos in an Argentine bank deposit, they are expected to receive only 20 pesos ( 2 % × 1 , 000 pesos) as interest." Is this statement a correct explanation of why the international Fisher effect would discourage U.S. investors from investing in Argentina? If not, provide a more accurate explanation for why investors who believe in IFE would not pursue the Argentine investment in this example.

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