Using IFE, assume that the interest rate on a one-year insured home country bank deposit is...
- Using IFE, assume that the interest rate on a one-year insured home country bank deposit is 6%, and the interest rate on a 1-year insured foreign bank deposit is 8%. For the actual returns of these two investments to be similar from the perspective of investors in the home country, the foreign currency would have to change over the investment horizon by the following percentage:
Homework Answers
The foreign currency would have to change by the following percentage:
ef = [(1 + ih)/(1 + if)] -1 where ih = interest rate on home country deposit and if = interest rate of foreign country deposit
ef = [(1+6%)/(1+8%)] -1 = -1.85%
The foreign currency would have to depreciate by 1.85%.
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