Numerical Example of US and South African Policy Rates
To provide a concrete illustration for the investment decision between US and South African assets, specific values are assigned to the relevant policy rates. The US policy rate (), representing the return on risk-free dollar assets, is assumed to be 4%. Concurrently, the South African policy rate (), representing the return on rand-denominated assets, is assumed to be 6.5%.
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Introduction to Macroeconomics Course
Ch.7 Macroeconomic policy in the global economy - The Economy 2.0 Macroeconomics @ CORE Econ
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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
A US-based investor observes that a one-year US government bond offers a 4% return, while a one-year South African government bond offers a 6.5% return. Assuming the investor's primary goal is to maximize their return in US dollars, under which of the following exchange rate scenarios would the US bond be the superior investment?
An investor is comparing a one-year US asset with a 4% return to a one-year South African asset with a 6.5% return. To make the US dollar return from the South African asset exactly equal to the return from the US asset, the South African rand would need to depreciate against the US dollar by approximately ____%. (Please provide your answer rounded to two decimal places).
Investment Advisor's Dilemma
Evaluating Investment Advice