The interest rate on pounds in the U.K. is 8%. The interest rate in the U.S. is 5%. Interest rate parity exists. U.S. investors will earn a lower return domestically than British investors earn domestically.

Question

Quizplus · Accepted Answer

According to interest rate parity, the return on foreign investment should be equal to the return on domestic investment adjusted for the exchange rate. In this case, if the interest rate on pounds is 8% and the interest rate on dollars is 5%, U.S. investors will need to earn an additional return of 3% from the exchange rate in order to achieve parity with British investors. Therefore, U.S. investors will have a lower return domestically than British investors.

The Interest Rate on Pounds in the U