Question 1. Use interst rate parity to answer this question. A U.S. investor has a choice between a risk-free one-year U.S. security with an annual return of 4%, and a comparable British security with a return of 5%. If the spot rate is $1.43/E, the forward rate is $1.44/E, and there are no transaction costs, the investor should invest in the U.S. security.
a. True
b. False
Question 2. (Ma) Assume the following information:
You have $1,000,000 to invest
Current spot rate of pound = $1.60
90foward rate of pound = $1.57
3 deposit rate in U.S = 12% nominal rate
3deposit rate in U.K. = 16% nominal rate
If you use covered interest arbitrage foe a 90 day investment, what will be the amount of U.S. dollars you will have after 90 days?
Question 3. A U.S. firm sells merchandise to a british company for E100,000 at a current exchange rate of $1.43/E. If the exchange rate changes to $1.45/E the U.S. firm will realize a _____ of ______.