The figure given below depicts the foreign exchange market for British pounds traded for U.S. dollars.Figure 22.2

-If you receive a dollar return of 6 percent on a one-year Korean bond that yields 10 percent annually, this means that between the purchase date and the time of maturity:
A)the Korean won (KR
W) has depreciated 4 percent against the U.S. dollar.
B)the dollar price of the Korean won (KR
W) has risen by 10 percent.
C)the percentage change in the dollar per Korean won exchange rate is 6 percent.
D)the dollar proceeds from the Korean bond are 4 percent higher than the initial dollar investment.
E)the dollar has depreciated 16 percent against the Korean won.

Question

The figure given below depicts the foreign exchange market for British pounds traded for U.S. dollars.Figure 22.2
 
-If you receive a dollar return of 6 percent on a one-year Korean bond that yields 10 percent annually, this means that between the purchase date and the time of maturity:
A)the Korean won (KR
W) has depreciated 4 percent against the U.S. dollar. 
B)the dollar price of the Korean won (KR
W) has risen by 10 percent. 
C)the percentage change in the dollar per Korean won exchange rate is 6 percent. 
D)the dollar proceeds from the Korean bond are 4 percent higher than the initial dollar investment. 
E)the dollar has depreciated 16 percent against the Korean won.

Quizplus · Accepted Answer

The return on the Korean bond is given in terms of dollars, so we need to calculate the change in the exchange rate between the purchase date and the time of maturity. If the bond yield is 10 percent annually and we receive a dollar return of 6 percent, then the effective yield on the bond in Korean won is 10% - 6% = 4%. This means that the Korean won has depreciated by 4 percent against the U.S. dollar between the purchase date and the time of maturity.

The Figure Given Below Depicts the Foreign Exchange Market for British