Can someone please explain Example 2 Solution to 2?
I think the ex post return on foreign bond should be
-9.1% (not -7.3%).
Why is the ex post return on foreigh bond = 1.03*(1.8/2) -1 = -7.3%?
I used 1.01 (not 1.03).
Thanks.
That is the foreign country intereset rate 3%.
I use the following approximate formula.
foreign country interest rate + gain/loss on currency conversion back to home currency = 3% + (1.8/2.0-1) = 3 - 10 = -7
In this case foreign currency depreciated by 10%.
Hope this helps.