Evaluating International Investment Choices
Imagine you are an investment advisor for a client based in the United States. The client is considering two one-year bonds with identical interest rates and credit risk: one issued in the Eurozone (denominated in euros) and one issued in Japan (denominated in yen). Your economic analysis forecasts a significant depreciation of the euro against the U.S. dollar over the next year, while the Japanese yen is expected to remain relatively stable against the U.S. dollar. Which of the two bonds would you recommend, and why? Justify your recommendation by explaining how the forecasted change in currency values would influence the total return for your U.S.-based client.
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Numerical Example of Expected Currency Depreciation (δ^E = 2.5%)
An investor based in the United States is considering purchasing a one-year bond issued in the United Kingdom. The investor forecasts that over the next year, the British pound will decrease in value relative to the U.S. dollar. Assuming this forecast is accurate, how will this change in currency value affect the investor's total return when calculated in U.S. dollars?
Contrasting Investment Outlooks
Calculating an Expected Future Exchange Rate
A Canadian investor is analyzing an investment in Mexico. If this investor expects the Mexican peso to depreciate against the Canadian dollar over the next year, they must also expect the nominal exchange rate, defined as the number of Mexican pesos per Canadian dollar, to decrease during that same period.
Evaluating International Investment Choices
An investor based in the United States is evaluating potential investments in the Eurozone. For each of the investor's forecasts below, match it to the correct implication for the expected rate of foreign currency depreciation (δ^E) and the nominal exchange rate (defined as Euros per U.S. dollar).
To accurately forecast the total return on a foreign asset in their own domestic currency, an investor must adjust the foreign asset's interest rate by subtracting the ________, which represents the anticipated percentage decrease in the foreign currency's value.
An investor based in Japan is considering buying a one-year bond from Australia. The investor analyzes several economic indicators and forms an expectation about the future value of the Australian dollar (AUD) relative to the Japanese yen (JPY). Arrange the following steps in the logical order that the investor would follow to evaluate this potential investment.
An investor based in the United States is considering an investment in Japan. The current exchange rate is 150 Japanese yen per U.S. dollar. The investor's forecast is that in one year, the exchange rate will be 153 Japanese yen per U.S. dollar. Based on this forecast, what can be concluded about the expected rate of foreign currency depreciation (δ^E) from the U.S. investor's perspective?
Investor Reaction to Economic News