Problem 5. The next problem is about covered interest rate parity. Assume that the home country is the Philippines, and a Filipino investor is mulling whether or not to invest P1 million in the US or in the PH. Bonds in either country mature in just 1 year. The initial parameters are as follows: • iPH = 8% • US = 12% • et = P50/USD • et+1 P55/USD Answer the following: • If the Filipino invests in a PH bond for 1 year, how much will she earn? • If the Filipino invests in a US bond for 1 year, how much will she earn in peso terms? • Is there a difference between the two values above? • How much did the peso depreciate/appreciate from time t to t + 1? • For the investor to be indifferent between investing here and abroad, she should engage in a forward exchange rate contract at what rate Ft?
Problem 5. The next problem is about covered interest rate parity. Assume that the home country is the Philippines, and a Filipino investor is mulling whether or not to invest P1 million in the US or in the PH. Bonds in either country mature in just 1 year. The initial parameters are as follows: • iPH = 8% • US = 12% • et = P50/USD • et+1 P55/USD Answer the following: • If the Filipino invests in a PH bond for 1 year, how much will she earn? • If the Filipino invests in a US bond for 1 year, how much will she earn in peso terms? • Is there a difference between the two values above? • How much did the peso depreciate/appreciate from time t to t + 1? • For the investor to be indifferent between investing here and abroad, she should engage in a forward exchange rate contract at what rate Ft?
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
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Transcribed Image Text:Problem 5. The next problem is about covered interest rate parity. Assume that the home
country is the Philippines, and a Filipino investor is mulling whether or not to invest P1
million in the US or in the PH. Bonds in either country mature in just 1 year. The initial
parameters are as follows:
iPH = 8%
¡US = 12%
• et = P50/USD
• et+1 = P55/USD
Answer the following:
• If the Filipino invests in a PH bond for 1 year, how much will she earn?
. If the Filipino invests in a US bond for 1 year, how much will she earn in peso terms?
• Is there a difference between the two values above?
• How much did the peso depreciate/appreciate from time t to t + 1?
• For the investor to be indifferent between investing here and abroad, she should engage
in a forward exchange rate contract at what rate Ft?
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