You are a US domestic investor and the current indirect exchange rate with the Euro is EUR/USD = $1.14. Because of all of the rumors that the ECB will be buying corporate bonds in Europe, the bond yield are higher in Europe than in the US. You decide to buy a bond paying 5% when your best alternative in the US market is 2.5%. If your expected exchange rate one year from now is EUR/USD = $1.10, then was this a good decision to buy the European bond instead of the US-denominated bond?
- This was a great decision, because the Euro appreciated. The domestic return is 4.82!
- This was not a good decision, because the Euro depreciated. The domestic return is 1.32!
- This was not a good decision, because the Euro depreciated. The domestic return is 4.82!
- This was a great decision, because the Euro appreciated. The domestic return is 6.12!