Home Policy Rate (i)
The home policy rate, denoted as 'i', represents the interest rate on guaranteed assets within the designated home economy. For a US investor considering an investment in South Africa, 'i' is the South African policy rate. A crucial aspect is that the return on this asset is guaranteed only in the local currency (South African rand), not in the foreign investor's currency (US dollars).
0
1
Tags
Economics
Economy
Introduction to Macroeconomics Course
Ch.7 Macroeconomic policy in the global economy - The Economy 2.0 Macroeconomics @ CORE Econ
The Economy 2.0 Macroeconomics @ CORE Econ
CORE Econ
Social Science
Empirical Science
Science
Related
One-Year Investment Horizon Assumption
Home Policy Rate (i)
Numerical Example of US and South African Policy Rates
Investor's Focus on Home Currency Rate of Return
Numerical Example of Expected Currency Depreciation (δ^E = 2.5%)
Risk of Currency Depreciation Offsetting High Interest Rates
Analytical Framework: Defining Home and Foreign Economies in the Investment Example
A manager of a US-based fund, whose obligations are in US dollars, is evaluating three one-year bond investment options to maximize the fund's return in US dollars. The options are:
- A US government bond with a guaranteed 3% annual return.
- A bond from Country A offering an 8% annual return in its local currency, which is expected to depreciate by 6% against the US dollar over the year.
- A bond from Country B offering a 4% annual return in its local currency, which is expected to appreciate by 2.5% against the US dollar over the year.
Based on the goal of maximizing the expected return in US dollars, which investment should the manager choose?
Foreign Bond Investment Analysis
Foreign Investment Decision Analysis
A US-based investment fund, which measures its returns in US dollars, is considering two one-year investment options. Option A is a US Treasury bond with a 4% annual yield. Option B is a South African government bond with a 7% annual yield, denominated in South African rand. Financial analysts predict that the South African rand will depreciate by 5% against the US dollar over the next year. Given this information, the South African bond is the more profitable investment for the fund.
Learn After
Approximation Formula for Foreign Investment Return in Home Currency
An investment manager for a US-based fund is comparing two one-year government bonds. The first is a US government bond offering a 3% annual return. The second is a government bond from Country Z, offering a 7% annual return, with the return guaranteed in Country Z's local currency. To accurately compare the potential returns in US dollars, which of the following pieces of information is most essential for the manager to consider?
Evaluating Foreign Investment Returns
Risk Assessment of Foreign Bonds
A Japanese investor is considering buying a one-year government bond from Australia. The Australian bond offers a 5% annual interest rate, guaranteed in Australian dollars. Based on this information, the Japanese investor is guaranteed to receive a 5% return on their investment when measured in Japanese yen.