Interest Rate Parity
Response to the following problem:
Consider investors who invest in either U.S. or British 1-year Treasury bills. Assume zero transaction costs and no taxes.
a. If interest rate parity exists, then the return for U.S. investors who use covered interest arbitrage will be the same as the return for U.S. investors who invest in U.S. Treasury bills. Is this statement true or false? If false, correct the statement.
b. If interest rate parity exists, then the return for British investors who use covered interest arbitrage will be the same as the return for British investors who invest in British Treasury bills. Is this statement true or false? If false, correct the statement.