2. Suppose a US firm offers a $105 face value bond, whose current price is $100. The current US-Yuan exchange rate is 8 (8 Yuan to buy 1 dollar). (a) How much Yuan does this bond currently cost? (b) If you expect the exchange rate to be 8.05 tomorrow, do you expect the Yuan to appreciate or depreciate? What is your expected return? (c) If you hear that China has been joined the WTO and is preparing to increase exports to the US, would you expect the exchange rate to increase to 8.1 or fall back to 7.9? Why? What would be the expected return then? Remember: This is a dollar denominated bond. (d) Would your answer in part (c) make you more or less likely to buy this bond?
