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.

-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
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.

Question

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.

-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
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.

Quizplus · Accepted Answer

Investing in U.K. treasury bills instead of U.S. treasury bills earns an extra return of 4% per year or 2% for the 6 months. This is because the U.K. interest rate is higher than the U.S. interest rate, but there is exchange rate risk associated with this investment.

Exhibit 11.1 Assume the Following: (1) the Interest Rate on Six-Month Treasury