Please help ! Assume that you are a U.S. investor. The nominal return on a U.S.

Question

Please help !

Assume that you are a U.S. investor. The nominal return on a U.S. bond is 5 percent and the nominal return on a German bond is 8 percent. Both bonds mature in one year. The current exchange rate is 1.12 /$. If uncovered exchange rate parity holds, you would expect the exchange rate a year from now to be /$. (Round your response to two decimal places.) Consider two bonds, one issued in euros ( ) in Germany, and one issued in dollars ($) in the United States. Assume that both government securities are one-year bonds-paying the face value of the bond one year from now. The face values and prices on the two bonds are given by: Compute the nominal interest rate on each of the bonds. The nominal interest rate on the U.S. bond is percent. (Enter a whole number.) The nominal interest rate on the German bond is percent. (Enter a whole number.) Which of the following is possible? (Mark all that apply.) Exports/GDP > 1 Imports/GDP > 1 Net Exports 1 Exports

Explanation / Answer

1).

currently

1 Dollar= 1.12 Euro

after 1 year,

1 dollar 1*(1.05)

after 1 year 1.12 Euro will become = 1.12*1.08

so, Exchange rate after 1 year i.e $1 = 1.12*1.08/1.05 = 1.152 Euro

exchanfge RATE AFTER 1 YEAR = 1.152Euro/$

2).

Interest rate in US bond = (10,000/9615.38)-1 = 4%

Interest rate on German bond = (10,000/9345.79)-1 = 7%

3).

which are possible,

Net Exports<0

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