Question

6. Suppose that there are only two countries in the world, US and Spain. US currency is dollar ($) and Spain uses Euro (€). US interest rate is 10% (0.10). Spot exchange rate ($/€) today is 1.4. Investors expect that the exchange rate in a year is 1.6.

1) What is the expected rate of depreciation of dollar?

2) For investors to choose to make euro deposit instead of dollar deposit, what is the possible range of interest rate in Spain? (3’)

Answer #1

**Please give ratings it
will be appreciable thank you**

(1) expected rate of appreciation = (difference in exchange rate)*100/ original dollar value

expected rate of appreciation = (1.6-1.4)100/1.4

expected rate of appreciation = 0.2*100/1.4

expected rate of appreciation = 20/1.4

expected rate of appreciation = 14.28%

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