ASSIGNMENT | What is the expected relationship between the relative real interest rates of two countries and the exchange rate of their currencies?

In a 750 to 1,000 words Microsoft Word document in APA (6.0) format, please respond to the following questions.

What is the expected relationship between the relative real interest rates of two countries and the exchange rate of their currencies?
List the factors that affect currency put option premiums, and briefly explain the relationship that exists for each.
What factors affect a firm\’s degree of transaction exposure in a particular currency?
For each factor, explain the desirable characteristics that would reduce transaction exposure.
***Please use the below reference as the primary source and use the additional sources to support the writer.

Moffett, M.H., Stonehill, A.I., & Eitman, D.K. (2015). Fundamentals of Multinational
Finance, (5th ed.). Upper Saddle River, NJ: Pearson Education, Inc.

SAMPLE SOLUTION

Relationship between Relative Real Interest Rates and the Exchange Rate
Holding other factors constant, the higher the real interest rate of an economy relative to another nation, the stronger will be its domestic currency. This interest rate indicates the “real” rate that the investors or lenders receive after factoring in inflation. In other words, it is the rate that is above and beyond the inflation rate (Tsionas, 2014). If an asset that compounds yearly has 8 percent nominal yield and the inflation rate is 5 percent, then the real interest rate is 3 percent. This suggests that real interest rate can be negative especially if the inflation rate surpasses the nominal investment rate. Real