Hong Kong fixes its exchange rate with the US$ at HK$7.8/US$, but the financial market expects a 10% chance of a 30% devaluation of the HK$ in the coming month and a 90% chance of no devaluation. To maintain the fixed exchange rate at HK$7.8/US$, the interest rate differential between the HK$ and US$ (measured in annual %) needs to be %

Hong Kong fixes its exchange rate with the US$ at HK$7.8/US$, but the financial market expects a 10% chance of a 30% devaluation of the HK$ in the coming month and a 90% chance of no devaluation. To maintain the fixed exchange rate at HK$7.8/US$, the interest rate differential between the HK$ and US$ (measured in annual %) needs to be %

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter4: Exchange Rate Determination

Section: Chapter Questions

Problem 25QA

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