S = $/£0.75; 1-year bond rate in UK= 5%; 1-year F = $/£0.77; 1-year bond rate...

S = $/£0.75; 1-year bond rate in UK= 5%; 1-year F = $/£0.77; 1-year bond rate US= 2%

a. Calculate the return on $1 invested in the UK. Where will global investors choose to invest?

b. Find the Spot rate that makes the return on investments equal across these two countries?

Expert Solution

1.
=1*0.75*1.05/0.77-1
=2.2727%

Invest in UK

2.
Spot rate=0.77*1.02/1.05
=0.748 $/Pound

jeff jeffy answered 2 years ago

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