Asked by Roseline Oshiyoye on Jun 10, 2024
Verified
Suppose the 1-year risk-free rate of return in the U.S. is 4%, and the 1-year risk-free rate of return in Britain is 7%. The current exchange rate is 1 pound = U.S. $1.65. A 1-year future exchange rate of ________ for the pound would make a U.S. investor indifferent between investing in the U.S. security and investing in the British security.
A) 1.6037
B) 2.0411
C) 1.7500
D) 2.3369
Risk-Free Rate
The theoretical rate of return of an investment with zero risk, often represented by the yield on government securities such as U.S. Treasury bills.
Future Exchange Rate
The anticipated value of one currency in terms of another currency at a future date, often used in hedging and trading strategies.
Indifferent
A state of having no preference or being neutral between two or more choices in decision-making scenarios.
- Master the essentials of currency exchange and its significance for investments across international borders.
Verified Answer
MM
Learning Objectives
- Master the essentials of currency exchange and its significance for investments across international borders.