Assume that the interest rate on a one-year insured bank deposit in the United States is 3%, and the interest rate on a 1-year insured bank deposit in Albania is 8%.

Using the simplified formula, for the actual returns of these two investments to be similar from the perspective of investors in the United States, by how much (as a percentage) does the Albanian currency have to change over the investment horizon?

 

Using the full formula, for the actual returns of these two investments to be similar from the perspective of investors in the home country, by how much (as a percentage) does the foreign currency have to change over the investment horizon?

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To calculate the required currency change well first use the simplified formula and then the full fo... View the full answer