Suppose the interest rate on one-year U.S. T-bills is 4% and interest rate on one-year British T-bills is 6.5%. If the dollar is at a one-year forward premium against the British pound of 3%, the covered interest differential is:

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Quizplus · Accepted Answer

The covered interest differential considers both the interest rate differential and the forward premium/discount. The U.S. T-bill rate is 4%, and the British T-bill rate is 6.5%. However, the dollar's forward premium of 3% effectively reduces the return on British T-bills to 3.5% (6.5% - 3%), making U.S. investments more favorable.

Suppose the Interest Rate on One-Year U