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.
D. 1.25%.
r(US) = [1 + r(UK)]F0/E0 1; [1.08][1.50/1.60] 1 = 1.25%.
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