Suppose the interest rate on one-year U.S. T-bills is 4 percent and the interest rate on one-year British T-bills is 6.5 percent. If the dollar is at a forward premium against the British pound of 1 percent, an American investor who does not want to face exchange-rate risk (but does want to earn the highest possible return) should
A. invest in dollar-denominated assets.
B. forego use of the forward exchange-rate market.
C. invest in pound-denominated assets.
D. do nothing because exchange-rate risk is unacceptable.
Answer: C
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