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Suppose you have the following information:

The current nominal interest rate for a 1-year deposit in a US bank is 2% (0.02). The current spot exchange rate between the US and Venezuela is 0.25.

The 1-year forward exchange rate between the US and Venezuela is 0.20.

Answer the following questions. Explain what assumptions you make in each case.

a. What are nominal interest rates in Venezuela?

b. What is the expected future spot exchange rate for one year from now?

c. What is the expected difference in inflation rates between the US and Venezuela over the next year?

d. Suppose that you are told that the interest rate in Venezuela is 0.3. Given your answers to a. through c. where should you invest, the US or Venezuela?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92319525

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