if you invest $100 in the U.K market for one year with a forward cover when...

if you invest $100 in the U.K market for one year with a forward cover when the interest rate and exchange rates are as given below, the annualized rate of return from the investment is:

Spot rate (bid-ask) = $1.3040-50/£; forward rate(bid-ask) = $1.3000-05/£, U.K. interest rate = 3%

Solutions

Expert Solution

At present we have $100 to invest in UK market for one year forward with a forward cover.

It will yield at an interest rate of 3% in UK market

Given spot rate =1.3040-1.3050

Pounds = USD *Bid(Pound/Dollar)

Pounds = USD*(1/Ask(dollar/pound))

= 100*1/1.3050

= 76.63 Pounds

We have to invest this 76.63 Pounds at an interest rate of 3% for one year

The maturity proceeds will be = 76.63*(1+0.03)

= 78.93 Pounds

We have to convert this pounds into USD(dollars)

USD = Pounds * Bid(USD/Pound)

= 78.93*1.3

= $102.61

Effective Annualised Yield = (102.61-100)/100*100

= 2.61%

jeff jeffy answered 2 years ago

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