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?

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter9: Forecasting Exchange Rates

Section: Chapter Questions

Problem 29QA

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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. Inflation rates forecasts (%) Exchange rate 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. If Mr. Garamond expects annual appreciation of the euro by 3.5%, what will be his choice?
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