The yield on a 1-year bill in the U.K.is 8% and the present exchange rate is 1 pound = U.S.$1.60.If you expect the exchange rate to be 1 pound = U.S.$1.50 a year from now,the return a U.S.investor can expect to earn by investing in U.K.bills is

Question

Quizplus · Accepted Answer

To calculate the return, we need to convert the yield on the bill from pounds to dollars:
Yield in dollars = Yield in pounds * Exchange rate
Yield in dollars = 8% * 1.60 = 12.8%

If we invest $1 in the bill, at the end of the year we will earn $1.128 (including the principal). Now we need to convert this to dollars at the expected exchange rate of 1 pound = U.S.$1.50:

Return = ($1.128)/1.50 - $1 = -$0.05 = -5%

Therefore, the answer is D) 1.25% (note that the question asks for the return that we can expect to earn, not the yield on the bill).

The Yield on a 1-Year Bill in the U