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Question 1. The spot exchange rate between US dollars and South Korean won is KRW1130/USD1. The following annual rates are observed and expected to persist over the short term: S. Korea USA Inflation rate 6% 2.5% Interest rate 4% x% (a) The interest rate in the USA is known to follow the Fisher Effect. (1) Calculate x, the interest rate in the USA. [3] marks (ii) Using the exact calculations from interest rate parity theory, calculate what the three- year forward exchange rate would be. [3] marks (iii) A US investor has the opportunity to invest in domestic bonds or won-bonds. The domestic US bonds have a face value of $1000, pay semi-annual coupons of 10% and have a maturity of three years. The won-bonds pay annual coupons of 14%, have a face value of W1000, and a maturity of three years. Calculate which bond gives the US investor the better return. [6] marks (iv) From the US investor's perspective, discuss the advantages and disadvantages of investing in eurobonds, as opposed to the domestic bonds, or won-bonds described in part (a)(iii) above. [6) marks