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 be indifferent, the return on both investments should be equal. Using the formula for interest rate parity: (1 + i_US) = (1 + i_SA) * (1 + % change in exchange rate), we find that the rand must appreciate by approximately 1.77% for the returns to be equal.