The yield on a 1-year bill in the U.K.is 6% and the present exchange rate is 1 Pound = US $2.00.If you expect the exchange rate to be 1 Pound = US $1.95 a year from now,the return a U.S.investor can expect to earn by investing in U.K.bills is approximately __________.

Question

Quizplus · Accepted Answer

To calculate the approximate return a U.S. investor can expect to earn by investing in U.K. bills, we need to use the interest rate parity formula:

(F/S) = (1 + r£)/(1 + r$)

where F/S is the forward exchange rate, r£ is the interest rate in the U.K., and r$ is the interest rate in the U.S.

Plugging in the given values, we get:

(1.95/2.00) = (1 + 0.06)/(1 + r$)

Simplifying, we get:

r$ = 0.0635 or 6.35%

Therefore, the approximate return a U.S. investor can expect to earn by investing in U.K. bills is:

(1 + 0.06) x (1.95/2.00) - 1 = 0.0335 or 3.35%

Thus, the best choice is C) 3.35%.

The Yield on a 1-Year Bill in the U