Reference no: EM133110355
Let Thailand be a home currency, the U.S. be a foreign currency, and the exchange rate is defined as units of home currency per unit of foreign currency, iUS = interest in the U.S., iTH = interest rate in Thailand, St = spot rate at time t, and Ft = forward rate at time t. The investor has a choice to invest either in the U.S. or in Thailand.
1. Please write down the forward rate (Ft) as a function of spot rate (St) such that the relationship between Ft and St satisfies the interest rate parity condition.
2. Assuming that iUS = 2%, iTH = 5%, St = 30.69 THB/USD, what should be the forward rate (Ft) according to the interest rate parity condition?
3. What are critical assumptions behind the calculation of the forward rate (Ft) in Question# 4.2?
4. Assuming that iUS = 2%, iTH = 5%, St = 30.69 THB/USD, and Ft is quoted at 31.65 THB/USD, other things being equal, where should investors invest their money? Please explain.
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