Refer to Exhibit 11.1. By investing in U.K. treasury bills rather than U.S. treasury bills, and NOT covering exchange rate risk, U.S. investors earn an extra return of
Exhibit 11.1
Assume the following: (1) the interest rate on six-month treasury bills is 8 percent per annum in the United Kingdom and 4 percent per annum in the United States; (2) today's spot price of the pound is $1.50, while the six-month forward price of the pound is $1.485.
a. 4 percent per year or 1 percent for the 6 months.
b. 4 percent per year or 2 percent for the 6 months.
c. 2 percent per year or 0.5 percent for the 6 months.
d. 2 percent per year or 1 percent for the 6 months.
b. 4 percent per year or 2 percent for the 6 months.
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