In June 2010, an investor is considering investing in bank deposits in Korea and Japan. The annual interest rate on Korean deposits is 6.25%, versus 3.75% on deposits in Japan. Suppose that the forward rate (for June 2011) in June 2010 is equal to F(won/yen) = 8.2. In June 2010, the expected exchange rate is 8.2 won/¥. For the remainder of this question, use the linear approximations for uncovered and covered interest rate parity. The spot exchange rate in June 2010 is E(won/yen) = 8 a. Does covered interest parity hold in this example? b. Does uncovered interest parity hold in this example? c. Suppose the exchange rate in June 2011 is equal to 7.472 won per yen. Calculate the investor’s actual return, assuming that he invests in Japanese deposits in June 2010. How do these answers compare with those from (b)? d. Consider two investors: one uses speculation and the other uses hedging. Based on your previous answers, which one earned a higher return (or smaller loss) on Japanese assets between June 2010 and 2011? Explain briefly why.
In June 2010, an investor is considering investing in bank deposits in Korea and Japan. The annual interest rate on Korean deposits is 6.25%, versus 3.75% on deposits in Japan. Suppose that the forward rate (for June 2011) in June 2010 is equal to F(won/yen) = 8.2. In June 2010, the expected exchange rate is 8.2 won/¥. For the remainder of this question, use the linear approximations for uncovered and covered interest rate parity. The spot exchange rate in June 2010 is E(won/yen) = 8 a. Does covered interest parity hold in this example? b. Does uncovered interest parity hold in this example? c. Suppose the exchange rate in June 2011 is equal to 7.472 won per yen. Calculate the investor’s actual return, assuming that he invests in Japanese deposits in June 2010. How do these answers compare with those from (b)? d. Consider two investors: one uses speculation and the other uses hedging. Based on your previous answers, which one earned a higher return (or smaller loss) on Japanese assets between June 2010 and 2011? Explain briefly why.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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In June 2010, an investor is considering investing in bank deposits in Korea and Japan. The
annual interest rate on Korean deposits is 6.25%, versus 3.75% on deposits in Japan. Suppose
that the forward rate (for June 2011) in June 2010 is equal to F(won/yen) = 8.2. In June 2010, the
expected exchange rate is 8.2 won/¥. For the remainder of this question, use the linear
approximations for uncovered and covered interest rate parity. The spot exchange rate in June
2010 is E(won/yen) = 8
annual interest rate on Korean deposits is 6.25%, versus 3.75% on deposits in Japan. Suppose
that the forward rate (for June 2011) in June 2010 is equal to F(won/yen) = 8.2. In June 2010, the
expected exchange rate is 8.2 won/¥. For the remainder of this question, use the linear
approximations for uncovered and covered interest rate parity. The spot exchange rate in June
2010 is E(won/yen) = 8
a. Does covered interest parity hold in this example?
b. Does uncovered interest parity hold in this example?
c. Suppose the exchange rate in June 2011 is equal to 7.472 won per yen. Calculate the
investor’s actual return, assuming that he invests in Japanese deposits in June 2010.
How do these answers compare with those from (b)?
d. Consider two investors: one uses speculation and the other uses hedging. Based on your
previous answers, which one earned a higher return (or smaller loss) on Japanese assets
between June 2010 and 2011? Explain briefly why.
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