Assume that interest rate parity holds. The UK one-year interest rate is 10 per cent and the Australian one-year interest rate is 8 per cent. What will the approximate effective yield be for an Australian citizen of a one-year deposit denominated in pounds? Assume the deposit is covered by a forward sale of dollars.
A) 10%
B) 8%
C) 2%
D) Cannot answer without more information.
Correct Answer:
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