Hong Kong fixes its exchange rate with the US$ at HK$7.8/US$, but the financial market expects a 40% chance of a 20% dev

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answerhappygod
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Hong Kong fixes its exchange rate with the US$ at HK$7.8/US$, but the financial market expects a 40% chance of a 20% dev

Post by answerhappygod »

Hong Kong fixes its exchange rate with the US$ at HK$7.8/US$,
but the financial market expects a 40% chance of a 20% devaluation
of the HK$ in the coming month, and a 60% chance of no devaluation.
To maintain the fixed exchange rate at HK$7.8/US$, what is the
required interest rate differential between the HK$ and US$
(measured in annual %)?
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