Q18. Please confirm if I am understanding this correctly. The key is that the Chinese spread over treasuries is not expected to change, which means real long term bond returns in both countries are the same. The short term interest rates that are 3% higher in the US have nothing to do with bond returns, and only significy that the market expects the currency of the US to depreciate by 3%. Bowers believes the US currency will depreciate by only 2%, therefore he gains 1% by going long the USD.
A) US Bond ----> earn X%
B) China bond and buy the USD forward —> earn X% + (3% - 2%)
C) China bond and then sell the CNY in one year ----> earn X% - (2% - 3%)
So answer is B, as you earn same bond return but gain on the long USD forward.