Your client has been offered a money market security with a par value £ 1000 that...

Your client has been offered a money market security with a par value £ 1000 that matures in one year in the UK market. The current price on the market is £ 954. The current exchange rate (S0) is 1.54 $/£. You also know that one year from now the exchange rate will be at 1.38 $/£. What is the effective yield of this security if your client holds the bond until maturity?

Expert Solution

Investment in UK	954.00
× Exchange rate	1.54
Investment in USA	1,469.16

One year outcome in UK	1,000.00
× Exchange rate	1.38
Return in USA	1,380.00
Less: investment in USA	(1,469.16)
Return on investment	(89.16)
/ Investment amount	1,469.16
Effective yield	-6.07%

Answer is:

-6.07%

jeff jeffy answered 2 years ago

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