Assume the U.S. one-year interest rate is 15%, while the South African one-year interest rate is 13%. If the South African rand ____ by ____%, a U.S.-based MNC is indifferent between investing in dollars and investing in rand.

Question

Quizplus · Accepted Answer

To determine whether a U.S.-based MNC is indifferent between investing in dollars and investing in rand, we need to compare the yields of both investments. 
For the U.S.-based MNC investing in dollars, the yield will be 15%. 
For the U.S.-based MNC investing in rand, the yield will be 13% plus any appreciation of the rand. 
To make the yields equal, we need to solve for x in the following equation:
15% = 13% + x%
x% = 2% 
Therefore, the rand would need to appreciate by 2% to make the yields equal. 
To determine the exchange rate needed for the rand to appreciate by 2%, we can use the following formula: 
New Exchange Rate = Old Exchange Rate * (1 + % Change)
New Exchange Rate = Old Exchange Rate * (1 + 2%) 
New Exchange Rate = Old Exchange Rate * 1.02 
Therefore, the rand would need to appreciate by 1.77 (or 77%) to make the yields equal. 
Since the question is asking which answer choice represents an appreciation of the rand, we can eliminate options A and D. Option B represents an appreciation of the rand, but the percentage is incorrect. Therefore, the correct answer is C.