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  2. If the current interest rate on a one-year government bond in the United Kingdom is 10%, what does the interest-rate parity condition indicate the interest rate will be on a one-year government bond in Germany?

If the current interest rate on a one-year government bond in the United Kingdom is 10%, what does the interest-rate parity condition indicate the interest rate will be on a one-year government bond in Germany?

ASSIGNMENT

Suppose that the current exchange rate is €1.73=£1, but it is expected to be €1.65=£1 in one year. If the current interest rate on a one-year government bond in the United Kingdom is 10%, what does the interest-rate parity condition indicate the interest rate will be on a one-year government bond in Germany?

Assume that there are no differences in risk, liquidity, taxation, or information costs between the bonds.

 


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