You have 20,000 EUR. The annualized UK interest rate is 4 percent, and the annualized EURO zone interest rate is 2% percent. The current spot rate of the EURO is GBP 0.8. If you expect the spot rate to remain the same after one year, which investment alternative would you choose? How would you structure your transactions? Calculate the gain compared to the second-best alternative if your expectation about the spot rate one year from now turns out to be true.

You have 20,000 EUR. The annualized UK interest rate is 4 percent, and the annualized EURO zone interest rate is 2% percent. The current spot rate of the EURO is GBP 0.8. If you expect the spot rate to remain the same after one year, which investment alternative would you choose? How would you structure your transactions? Calculate the gain compared to the second-best alternative if your expectation about the spot rate one year from now turns out to be true.

Brief Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781337091985

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter13: Open-economy Macroeconomics: Basic Concepts

Section: Chapter Questions

Problem 2QR

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