You are given the following information:

	U.S.	India	Columbia
Nominal one year interest rate	5.30%	7.75%	13%
Spot rate	-----	$0.012	$0.00026

Interest rate parity exists between the U.S. and India as well as the U.S. and

Colombia. The international Fisher effect exists between the U.S. and India as well as

the U.S. and Colombia. The official currency of India is the Indian rupee and the

official currency of Colombia is the Colombia peso.

Noah (based in the U.S.) invests in a one-year CD (certificate of deposit) in India and

sells Indian rupee one year forward to cover his position.

Mia (based in India) invests in a one-year CD in Colombia and does not cover her

position.

What are the returns on funds invested for Noah and Mia respectively? What

conclusions/comments related to IRP and/or IFE can you make from Noah's return

and Mia's return respectively? (Hint: You can get the exchange rate between the

Indian rupee and the Colombia peso from their respective rate to USD.)

Answer rating: 100% (QA)

To calculate the returns on funds invested for Noah and Mia well use interest rate parity IRP and in... View the full answer