Description of this paper

The chronic inability of California to balance its...

Description

Solution


Question

The chronic inability of California to balance its budget has forced Congress to authorize the state to issue/adopt its own currency in order to permit monetization of the state?s massive public indebtedness. Units of this currency, the C-Note, have a spot exchange rate with the U.S. dollar of $5.0000/CN 1. The risk-free interest rate on zero-coupon US Treasury notes having 2 years to maturity is 1.0 percent per year. By contrast, the interest rate on risk-free C-Note-denominated zero-coupon bonds having 2 years to maturity is 9.5 percent. Assuming that the forward exchange rate for an exchange of dollars and C-Notes at the end of two years is $4.00/CN1, determine whether an investor with a 2-year investment horizon should invest in US Treasury notes or California C-Note-denominated bonds.

 

Paper#7287 | Written in 18-Jul-2015

Price : $25
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