QUESTION 8 10 points Save Answer 1-year $ interest rate is 6% and 1-year Yuan in

Question

QUESTION 8 10 points Save Answer 1-year $ interest rate is 6% and 1-year Yuan interest rate is 10%. Suppose investors are risk-averse instead of risk-neutral. According to UIP, investors are expecting to__relative to Yuan bythan percent. Appreciate; more; 4 Appreciate; less; 4 Appreciate; less; 16 Depreciate; less16 QUESTION 9 10 points Save Answer 1 year $ interest rate is 6% and 1-year Yuan interest rate is 10%. Investors risk neutra Yuan/ exchange rate to be 5Yuan/$. What does this imply about spot exchange rate? are expecting the Spot rate is 6.23 Yuan/$ Not enough information Spot rate is 4.82 Yuan/s QUESTION 10 10 points Save Answer Suppose euro interest is 4% and investors are expecting euro to depreciate by 1 % relative to $ in 1 year, what is the gross return if an investor converts $ into euro, invest in euro saving account, and then convert the euro back to $ after 1 year? 196 3% 4% 5%

Explanation / Answer

Consider the given problem, here let’s assume that “$” be the home currency and “Yuan” be the foreign currency , => according to UIP “i(H) = i(F) + d”, where “d” be the expected depreciation of the “H” currency. So “6 = 10 + d, => d = (-4)”, the “$” will appreciate, since here the investor is “risk averse”, => the “$” will appreciate by less the 4%.

=> “B”.

Q9.

Here, “Yuan” be the home currency and “$” be the foreign be the foreign currency.

According to the UIP “ 10 = 6 + d, => d = 4%”, => the “Y” should depriciate by 4%, and investor are expecting the expected exchange should be “5”, so if the spot exchange rate is “4.82” => 4% increase of “4.82” is 5%.

=> “c”.

Q10.

Now, here initial return in euro is “4%” and the investor are expecting the euro to depreciate by 1%, so according to UIP, “4 = i* + 1, => i* = 3%”. So, the gross return if an investor converts $ in to euro, invest in euro saving account and then convert the euro back to $ is “3%”.

=> “B”

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