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.If the price of the six-month forward pound were to ____, then U.S.investors would no longer earn an extra return by shifting funds to the United Kingdom.
A) rise to $1.52
B) rise to $1.53
C) fall to $1.48
D) fall to $1.47

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.If the price of the six-month forward pound were to ____, then U.S.investors would no longer earn an extra return by shifting funds to the United Kingdom.
A) rise to $1.52
B) rise to $1.53
C) fall to $1.48
D) fall to $1.47

Quizplus · Accepted Answer

According to the exhibit, the six-month forward rate for the pound is currently $1.50. To earn an extra return by shifting funds to the United Kingdom, the forward rate would need to be lower than the current spot rate of $1.50. Therefore, if the price of the six-month forward pound were to fall to $1.47, U.S. investors would no longer earn an extra return by shifting funds to the United Kingdom.

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