Assume the spot rate for the British pound currently is £.7287 per dollar and the one-year forward rate is £.7304. A risk-free asset in the U.S. is currently earning 3 percent. If interest rate parity holds, approximately what rate can you earn on a one-year risk-free British security?
A) 3.16 percent
B) 3.03 percent
C) 2.92 percent
D) 2.84 percent
E) 3.24 percent
E) 3.24 percent
Explanation: (£.7304/£.7287) = (1 + RFc)/1.03
RFC = .0324, or 3.24%
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