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

-Assume that a British investor buys a one-year U.S. Treasury bill that pays 6 percent annual interest. Given a yield of 4 percent on a comparable British Treasury bill, the U.S. dollar must depreciate 2 percent against the British pound during the year for interest rate parity to hold.

Question

The figure given below depicts the foreign exchange market for British pounds traded for U.S. dollars.Figure 22.2
 
-Assume that a British investor buys a one-year U.S. Treasury bill that pays 6 percent annual interest. Given a yield of 4 percent on a comparable British Treasury bill, the U.S. dollar must depreciate 2 percent against the British pound during the year for interest rate parity to hold.

Quizplus · Accepted Answer

Interest rate parity suggests that the difference in interest rates between two countries should equal the expected change in exchange rates. Here, the U.S. interest rate is 6% and the UK rate is 4%, so the USD must depreciate by 2% against the GBP to maintain parity.

The Figure Given Below Depicts the Foreign Exchange Market for British