Suppose a U.S.firm buys a one-year U.K.bond for 6,000 British pounds when 1 British pound is worth $1.50 on the foreign exchange market.What is the firm's approximate rate of return on the bond if the interest rate on the bond is 15 percent and the exchange rate is 1 British pound is worth $1.93 at maturity?

Question

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The firm initially spends $9,000 (6,000 pounds * $1.50). At maturity, the bond is worth 6,900 pounds (6,000 pounds * 1.15). Converting back to dollars at the new exchange rate, the firm receives $13,317 (6,900 pounds * $1.93). The rate of return is approximately 48% (($13,317 - $9,000) / $9,000).