Suppose that the nominal interest rate on 10 year bonds is the 10% at home and 6% abroad. Further assume inflation is expected to be 3% abroad and 6% at home.
1. Determine the expected annual real depreciation consistent with interest parity?
2. Determine the expected annual nominal depreciation consistent with interest parity?
3. If you expected a nominal appreciation of the domestic currency over the next 10 years, explain which bond would you purchase?