The figure given below depicts the foreign exchange market for British pounds traded for U.S. dollars.Figure 22.2

-The dollar return on a foreign investment is less than the interest rate on the foreign asset, if the foreign currency depreciates against the U.S. dollar between the purchase date and the maturity date.

Question

The figure given below depicts the foreign exchange market for British pounds traded for U.S. dollars.Figure 22.2
 
-The dollar return on a foreign investment is less than the interest rate on the foreign asset, if the foreign currency depreciates against the U.S. dollar between the purchase date and the maturity date.

Quizplus · Accepted Answer

The dollar return on a foreign investment incorporates both the interest earned on the foreign asset and the gains or losses from changes in exchange rates. If the foreign currency depreciates against the U.S. dollar, the value of the interest earned in foreign currency is reduced when converted back to dollars, potentially making the total dollar return less than the interest rate on the foreign asset.

The Figure Given Below Depicts the Foreign Exchange Market for British