An investor based in the United States wishes to invest

#4560
An investor based in the United States wishes to invest in Swiss bonds with a maturity oi 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 current 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 inflation rates are fully predictable, and expected inflation over the next year is 1.5
percent in the 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 return over one year on the Swiss bond in 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 that 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
the Swiss bond investment now? Is the return on the Swiss bond the same as in part (a)?
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An investor based in the United States wishes to invest

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