Calculate the real exchange rate-expected exchange rate

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Reference no: EM131190882

An investor based in the United States wishes to invest on Swiss bonds with a maturity of one year. Suppose that the ratio of the price levels of a typical consumption basket in the United States versus Switzerland is 1 to 1.5 and the currenct exchange rate is $0.62 per swiss franc. the one year interest rate is 2 percent in the united states and 4.5 percent in Switzerland. assume that the inflation rates are fully predictable and expected inflation over the next year is 1.5 percent int he united states and 4 percent in Switzerland.

A) assuming that real exchange rates remain constant, calculate the real exchange rate, the expected exchange rate in one year and the expected returns over one year on the swiss bond in the U.s. dollar terms.

B) Now assume that the inflation rate over the one year period has been 1.5 percent in the united states and 4 percent in switzerland. Further, assume the exchange rate at the end of one year is $0.63 per swiss franc. Calculate the real exchange rate at the end of one year. What is the return on swiss bond investment now? is the return on the swiss bond the same as in part (a) explain. Please show your calculations

Reference no: EM131190882

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