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Question
Suppose you are an investor who is considering buying a one-year British government bond that has a 4 percent interest rate or a one-year French government bond with a 7 percent interest rate. The exchange rate today is 2.00 euros per pound and you expect the exchange rate to be 2.10 euros per pound one year from now.a.Which bond would you purchase? Why? Show your calculations.
b.Suppose you expect the exchange rate to be 2.05 euros per pound in one year, instead of 2.10 euros per pound. Would you change your decision about which bond to buy? Explain and show your calculations.
Answer
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