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
A. 1.6037
1.04/1.07 = x/1.65; x = 1.6037.
Business
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