Asked by Mikayla Pearson on May 26, 2024
Verified
Suppose the 1-year risk-free rate of return in the U.S. is 3.5%. The current exchange rate is 1 pound = U.S. $1.70. The 1-year forward rate is 1 pound = $1.65. What is the minimum yield on a 1-year risk-free security in Britain that would induce a U.S. investor to invest in the British security?
A) 2.64%
B) 2.85%
C) 3.34%
D) 6.62%
E) None of the options are correct
Risk-free Rate
The expected return from an investment that carries no risk of losing money, commonly indicated by the interest rate on treasury securities.
Forward Rate
An agreed-upon interest rate for a loan or investment to be initiated in the future, used in forward contracts and financial planning.
British Security
Financial instruments issued by the United Kingdom, including government bonds, stocks, and other securities, used for investment purposes.
- Comprehend the implications of exchange-rate fluctuations and methods for their mitigation.
Verified Answer
BG
Britni GurganusMay 31, 2024
Final Answer :
C
Explanation :
1.035 = (1 + r) × [1.65/1.70] − 1; r =3.34%.
Learning Objectives
- Comprehend the implications of exchange-rate fluctuations and methods for their mitigation.