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    future value of the domestic currency

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    Suppose the interest rate on a domestic debt instrument is 10% and the expected rate of inflation is 5%. Further, suppose that the foreign nominal rate on a similar instrument is 6% and expected foreign inflation rate is 4%. Based upon the real interest rates what is your forecast of the future value of the domestic currency? Explain.

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    Solution Preview

    First calculate the real interest rate for both the countries.

    Real Interest Rate = (1+nominal Interest rate)/(1+inflation rate)-1

    For home country ...

    Solution Summary

    The expert calculates the real interest rate for both the countries.