Posted: June 13th, 2022

Finance Homework

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Sheet1
HW 4 NAME: Don’t forget to Click
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1.a Interest rate for 10-year US government bonds is 3.145% , and for
similar bonds in China, let it be 6.854% .Assume there is no risk difference between
the two currencies.According to the interest rate parity model, the expected % change in the
exchange rate of the Chinese Yuan to the US $ (Dollar price of Yuan) over 10 years is .
Such a change represents a long-term of the Chinese currency, but also its
immediate . (Write “D” for Devaluation, “R” for Revaluation, and “N” for No Change.)
0.8750204629
1.b Now assume interest rate parity does not hold, and that R > R +(Ee-E)/ E
So the left and right hand sides differ by 1.0%
This would mean that currency traders could make an expected 1% profit by taking their money out of
and lending to borrowers in .This currency trading also
(“Y” for Yuan, “D” for Dollars) (“Y” for Yuan, “D” for Dollars)
the curent exchange rate, E ,and thus the Yuan relative to Dollar.
(Write “I” for Increases, “D” for Decreases.) (Write “D” for Devaluing “R”, for Revaluing.)
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1.c Let’s say that the above is now: R > R +(F-E )/ E,where note that the first E on the right has been replaced
with an F for a future transaction, and where the inequality may (or may not) have been reversed.
Let’s say that the two sides differ by only 0.01%. This means that by arbitrage, currency traders can guarantee
themselves a risk-free profit by borrowing in and lending in .
(“Y” for Yuan, “D” for Dollars) (“Y” for Yuan, “D” for Dollars)
This trade will havethe effect of the curent exchange rate, E ,and thus Yuan to Dollar.
(Write “I” for Increasing, “D” for Decreasing.) (Write “D” for Devaluing “R”, for Revaluing.)
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Y
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$
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Y
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