Asked by Abigail leyva on May 27, 2024
Verified
Suppose the 1-year risk-free rate of return in the U.S. is 5%. The current exchange rate is 1 pound = U.S. $1.60. The 1-year forward rate is 1 pound = $1.57. 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) 2.44%
B) 2.50%
C) 7.00%
D) 7.62%
E) None of the options are correct.
Risk-Free Rate
A concept describing the return investors expect to earn from an absolutely risk-free investment over a certain period of time, typically associated with government bonds.
Forward Rate
A term in finance that refers to the future interest rate agreed upon in a forward contract, or the rate used to discount a future financial transaction.
- Familiarize oneself with the notion of currency exchange and its implications for investing internationally.
Verified Answer
SS
Sharadhi SrikanthMay 29, 2024
Final Answer :
C
Explanation :
1.05 = (1 + r) × [1.57/1.60] − 1; r = 7.0%.
Learning Objectives
- Familiarize oneself with the notion of currency exchange and its implications for investing internationally.