Suppose the 1-year risk-free rate of return in the U.S.is 5%.The current exchange rate is 1 pound = U.S.$1.60.The 1-year forward rate is 1 pound = $1.57.What is the minimum yield on a 1-year risk-free security in Britain that would induce a U.S.investor to invest in the British security
A)2.44%
B)2.50%
C)7.00%
D)7.62%
E)None of the options

Question

Quizplus · Accepted Answer

1.05 = (1 + r) × [1.57/1.60] - 1; r = 7.0%.

Suppose the 1-Year Risk-Free Rate of Return in the U