Suppose you have one U.S.dollar with which you wish to purchase U.K.(one-year)bonds in period t.Which of the following expressions represents the amount of U.S.dollars you will receive in one year (i.e.,period t + 1)from purchasing U.K.bonds in period t?

Question

Quizplus · Accepted Answer

The correct expression to use is the forward exchange rate formula:

Fet₊₁ = Et (1 + i*) / Eᵉt₊₁

where Fet₊₁ is the expected future spot exchange rate, Et is the current spot exchange rate, i* is the foreign interest rate, and Eᵉt₊₁ is the expected future spot exchange rate.

To solve for the amount of U.S. dollars you will receive in one year from purchasing U.K. bonds, we need to rearrange the formula:

Fet₊₁ / Et = (1 + i*) / Eᵉt₊₁

Since Et/Eᵉt₊₁ is the current spot exchange rate, we can simplify the expression as follows:

Fet₊₁ / Et = (1 + i*) / Eᵉt₊₁
Fet₊₁ / 1 = (1 + i*)Et / Eᵉt₊₁

Thus, the correct expression for the amount of U.S. dollars you will receive in one year is (1 + i*)Et / Eᵉt₊₁, which corresponds to answer choice D.

Suppose You Have One U