Asked by Felicia Thompson on May 25, 2024
Verified
The yield on a 1-year bill in the U.K. is 8%, and the present exchange rate is 1 pound = U.S. $1.60. If you expect the exchange rate to be 1 pound = U.S. $1.50 a year from now, the return a U.S. investor can expect to earn by investing in U.K. bills is
A) −6.7%.
B) 0%.
C) 8%.
D) 1.25%.
E) None of the options are correct.
Present Exchange Rate
The current rate at which one currency can be exchanged for another in the foreign exchange market.
U.K. Bills
Short-term debt instruments issued by the United Kingdom government to finance its operations.
- Understand the concept of currency exchange and its effects on international investments.
Verified Answer
HP
Hriday PatelMay 29, 2024
Final Answer :
D
Explanation :
r(US) = [1 + r(UK)]F0/E0 − 1; [1.08][1.50/1.60] − 1 = 1.25%.
Learning Objectives
- Understand the concept of currency exchange and its effects on international investments.