What is the probability that the yield of the two-currency portfolio is less than the domestic yield

Question

Quizplus · Accepted Answer

The yield of the two-currency portfolio will be less than the domestic yield if the exchange rate depreciates by more than or equal to the difference between the two yields. The exchange rate changes by a normal distribution with a mean of 0.025 and standard deviation of 0.04, and the difference between yields is 0.05 - 0.03 = 0.02. Therefore, the probability of the exchange rate depreciating by at least 0.02 is P(Z <= -0.5), which is 0.3085. Multiplying this by the probability that the domestic yield is higher (0.5), we get 0.15425. Rounding up, the answer is 0.1575.

What Is the Probability That the Yield of the Two-Currency