You have the opportunity to invest in the United States at 6% or invest in an equally risky Australian investment that offers 20%. This is too good to be true! The current exchange rate is A$1.65/$. Which one of the following do you suspect about this 1-year investment?
A) Expected inflation is higher in the United States.
B) The 1-year forward exchange rate is A$1.8679/$.
C) Real interest rates are higher in the United States.
D) The Australian dollar is selling forward at an 8.48% premium relative to the dollar.
Correct Answer:
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