An American Hedge Fund is considering a one-year investment in an Italian government bond with a one-year maturity and a euro-denominated rate of return of i_€ = 5%. The bond costs €1,000 today and will return €1,050 at the end of one year without risk. The current exchange rate is €1.00 = $1.50. U.S. dollar-denominated government bonds currently have a yield to maturity of 4%. Suppose that the European Central Bank is considering either tightening or loosening its monetary policy. It is widely believed that in one year there are only two possibilities: Following revaluation, the exchange rate is expected to remain steady for at least another year.
-Find the IRR in dollars for the American firm if they wait one year to buy the bond after the exchange rate falls to S₁($|€)= $1.40 per €.Assume that i€ doesn't change.

Question

An American Hedge Fund is considering a one-year investment in an Italian government bond with a one-year maturity and a euro-denominated rate of return of i_€ = 5%. The bond costs €1,000 today and will return €1,050 at the end of one year without risk. The current exchange rate is €1.00 = $1.50. U.S. dollar-denominated government bonds currently have a yield to maturity of 4%. Suppose that the European Central Bank is considering either tightening or loosening its monetary policy. It is widely believed that in one year there are only two possibilities:

Following revaluation, the exchange rate is expected to remain steady for at least another year.
-Find the IRR in dollars for the American firm if they wait one year to buy the bond after the exchange rate falls to S₁($|€)= $1.40 per €.Assume that i€ doesn't change.

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The Answer of An American Hedge Fund is considering a one-year investment in an Italian government bond with a one-year maturity and a euro-denominated rate of return of i € = 5%. The bond costs €1,000 today and will return €1,050 at the end of one year without risk. The current exchange rate is €1.00 = $1.50. U.S. dollar-denominated government bonds currently have a yield to maturity of 4%. Suppose that the European Central Bank is considering either tightening or loosening its monetary policy. It is widely believed that in one year there are only two possibilities: Following revaluation, the exchange rate is expected to remain steady for at least another year. -Find the IRR in dollars for the American firm if they wait one year to buy the bond after the exchange rate falls to S₁($|€)= $1.40 per €.Assume that i€ doesn't change.

An American Hedge Fund Is Considering a One-Year Investment in an Italian