The following table reports the nominal exchange rate of the US dollar against two other American currencies (Canadian dollar and Mexican pesos) on 31/12/2021. It also presents the inflation rates' forecasts for the next 1-year period (estimated by the OECD), as well as the 1- year government bond yield (in %) for both countries. Exchange rate USA Canadian dollar (CAD) Mexican peso (MXN) 1.27 20.46 Inflation rates' forecasts (%) 4.78 3.25 4.43 1-year government bond yield (%) 0.38 0.76 6.92 Mr. Garamond, the owner of a small publishing house in Bologna, plans to invest 2.5 million euros for one year, and he thinks to buy either a US bond with interest rate 0.38% or an Italian bond with interest rate -0.49%. Note also that today's euro nominal exchange rate per $equals 0.876. i. If Mr. Garamond expects annual appreciation of the euro by 3.5%, what will be his choice? Comment on your answer ii. Which expectations' scheme regarding the exchange rate will make Mr. Garamond indifferent between the two alternatives?
The following table reports the nominal exchange rate of the US dollar against two other American currencies (Canadian dollar and Mexican pesos) on 31/12/2021. It also presents the inflation rates' forecasts for the next 1-year period (estimated by the OECD), as well as the 1- year government bond yield (in %) for both countries. Exchange rate USA Canadian dollar (CAD) Mexican peso (MXN) 1.27 20.46 Inflation rates' forecasts (%) 4.78 3.25 4.43 1-year government bond yield (%) 0.38 0.76 6.92 Mr. Garamond, the owner of a small publishing house in Bologna, plans to invest 2.5 million euros for one year, and he thinks to buy either a US bond with interest rate 0.38% or an Italian bond with interest rate -0.49%. Note also that today's euro nominal exchange rate per $equals 0.876. i. If Mr. Garamond expects annual appreciation of the euro by 3.5%, what will be his choice? Comment on your answer ii. Which expectations' scheme regarding the exchange rate will make Mr. Garamond indifferent between the two alternatives?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:The following table reports the nominal exchange rate of the US dollar against two other
American currencies (Canadian dollar and Mexican pesos) on 31/12/2021. It also presents the
inflation rates' forecasts for the next 1-year period (estimated by the OECD), as well as the 1-
year government bond yield (in %) for both countries.
Exchange rate
Inflation rates'
forecasts (%)
1-year government
bond yield (%)
USA
4.78
0.38
-
Canadian dollar (CAD)
1.27
3.25
0.76
Mexican peso (MXN)
20.46
4.43
6.92
Mr. Garamond, the owner of a small publishing house in Bologna, plans to invest 2.5
million euros for one year, and he thinks to buy either a US bond with interest rate 0.38% or
an Italian bond with interest rate -0.49%. Note also that today's euro nominal exchange rate
per $ equals 0.876.
i. If Mr. Garamond expects annual appreciation of the euro by 3.5%, what will be his choice?
Comment on your answer
ii. Which expectations' scheme regarding the exchange rate will make Mr. Garamond
indifferent between the two alternatives?
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