Please post your ansers. I do have trouble with the answer given on the second question. Lets see what you guys comeup with. A Korean investor (currency = won) is considering the purchase of a U.S. bond. The current exchange rate is 100 (won to $). Korean inflation is 1% and U.S. inflation is 5%. Interest rates in Korea are 4% and in the U.S. are 8%. Assuming that the real rate remains constant, what is the domestic currency return from the purchase of the U.S. bond? A) 4%. B) 3%. C) 12%. A U.K. investor is considering the purchase of a Japanese bond. The current exchange rate is 150 (yen to pounds). The real rate is assumed to be constant. Inflation in Japan is 0% and interest rates are 2%. U.K. inflation is 3% and interest rates are 5%. What is the domestic currency return to the purchase of the Japanese bond? A) 3%. B) 5%. C) 2%.

A B

I was caught by the currency rate movements and got the second question wrong.

I also often struggle with these currency questions. Especially those in PM with real currency rate movements.

C b

A Korean investor (currency = won) is considering the purchase of a U.S. bond. The current exchange rate is 100 (won to $). Korean inflation is 1% and U.S. inflation is 5%. Interest rates in Korea are 4% and in the U.S. are 8%. Assuming that the real rate remains constant, what is the domestic currency return from the purchase of the U.S. bond? A) 4%. B) 3%. C) 12%. real rate remains constant. So based on above: Domestic currency won appreciates by about 5-1 = 4%. FCRP=4-(4-8) = +8 So domestic currency return = local risk free rate + FCRP = 4+8 = 12% also equal to foreign currency risk free rate + currency appreciation = 8 + 4 = 12% So C) ? A U.K. investor is considering the purchase of a Japanese bond. The current exchange rate is 150 (yen to pounds). The real rate is assumed to be constant. Inflation in Japan is 0% and interest rates are 2%. U.K. inflation is 3% and interest rates are 5%. What is the domestic currency return to the purchase of the Japanese bond? A) 3%. B) 5%. C) 2%. Inflation differential = 3% - so Yen will appreciate by 3% FCRP=-3-(2-5) = 0% so domestic currency return = rf UK + FCRP = 5 + 0 = 5% also = currency appreciation + japan return = 3 + 2 = 5% choice B.

cpk123 Wrote: ------------------------------------------------------- > real rate remains constant. So based on above: > Domestic currency won appreciates by about 5-1 = > 4%. > > FCRP=4-(4-8) = +8 > So domestic currency return = local risk free rate > + FCRP = 4+8 = 12% > also equal to foreign currency risk free rate + > currency appreciation = 8 + 4 = 12% > > So C) ? When the domestic currency (won) appreciates then die foreign currency (USD) depreciates. So you have a loss for foreign currency depreciation of 4%. So you get 8% from the US-Bond minus 4% currency depreciation = 4% return

I believe 12% is the right answer. Please check 443-444 on the text book, example 4 for a similar example. and let me know where I am going wrong… the fact that rfc+currency appreciation=rdc + fcrp has to hold cannot be wrong.

A B The FCRP for both questions is zero.

A B

- Inflation differential = Domestic - Foriegn = 1% - 5% = -4% (1 + 0.08) * (1 + (-0.04)) - 1 = 3.68% or 4% (A) 2. Inflation differential = Domestic - Foreign = 3% - 0% = 3% (1 + .02) * (1 + .03) - 1 = 5.06% or 5% (B)

is it A and B? I get confused on these as well

We don’t need calculations at all here. FCRP is 0 for both questions. So DC Returns = Local RFR So ans must be A and B?

kochunni69 Wrote: ------------------------------------------------------- > Please post your ansers. I do have trouble with > the answer given on the second question. Lets see > what you guys comeup with. > > > A Korean investor (currency = won) is considering > the purchase of a U.S. bond. The current exchange > rate is 100 (won to $). Korean inflation is 1% and > U.S. inflation is 5%. Interest rates in Korea are > 4% and in the U.S. are 8%. Assuming that the real > rate remains constant, what is the domestic > currency return from the purchase of the U.S. > bond? > > A) 4%. > > B) 3%. > > C) 12%. > > > > A U.K. investor is considering the purchase of a > Japanese bond. The current exchange rate is 150 > (yen to pounds). The real rate is assumed to be > constant. Inflation in Japan is 0% and interest > rates are 2%. U.K. inflation is 3% and interest > rates are 5%. What is the domestic currency return > to the purchase of the Japanese bond? > > A) 3%. > > B) 5%. > > C) 2%. 1: Should just be Infl diff. DCI - FCI: 4-8 =-4%+Interest rate of8% = 4% A 2: Same thing: 3%+0 = 3% + Interest rate of 2% --> 5% B