Question

1. Suppose you expect the Croatian currency, the Kuna, to appreciate 5% relative to the USD over the next 6 months. What additional information would you need in order to decide whether it is a good time to buy Kuna

Answer 1

Even with the information about the Croatian Kuna appreciating against the dollar over the next 6 months, one important additional information is still needed, and that is the interest differential between the securities in both Kuna and US Dollar.

This is because the interest differential may not be higher for the Kuna and even if the Kuna is appreciating, simply because when calculating the interest differential, there are other factors at play.