0b86b51c6a11b63d48ea6a9613ef355384dca1df7b2b0bae1fb5535bccd52330

0b86b51c6a11b63d48ea6a9613ef355384dca1df7b2b0bae1fb5535bccd52330

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Econ301wi11 Dong Won Lee - 1 - Chapter 18. Questions and Problems Answers 3. a. The nominal interest rate on the U.S. bond is %. 4 100 38 . 615 , 9 38 . 615 , 9 000 , 10 = × - The nominal interest rate on the German bond is %. 6 100 96 . 433 , 9 96 . 433 , 9 000 , 10 = × - b. Uncovered interest parity condition is given by + = + + e t t t t E E i i 1 * ) 1 ( ) 1 ( . Solving for e t E 1 + , we get 76 . 0 ) 75 . 0 ( 04 . 1 06 . 1 ) 1 ( ) 1 ( * 1 = + + = + t t t e t E i i E euros/$. c. If you expect the dollar to depreciate, you should purchase the German bond, since it pays a higher interest rate and you expect a capital gain on the currency (each euro would be worth more relative to the dollar one year from now). d. The dollar depreciates by 4%
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Unformatted text preview: -= 100 75 . 75 . 72 . , so the total return on the German bond(in $) is [ 6% (nominal interest gain) + 4% (capital gain on the currency) ] = 10%. Investing in the U.S. bond would have produced a 4% (nominal interest gain) return. e. No, 10% and 4% are not the same. The uncovered interest parity (UIP) condition is about equality of expected returns, not equality of actual returns. As you found in part (b), the dollar is expected to appreciate , but in part (d) it turns out that the dollar actually depreciates one year later, contradicting what the UIP condition suggests....
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