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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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 Winter '08

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