Question

Use interest rate parity to answer this question. A U.S. investor has a choice between a risk minus free one minus 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/pound​, the forward rate is ​$1.44/pound​, and there are no transaction​ costs, the investor should invest in the U.S. security. True or false?

Answer 1

Answer:

it is false

Explanation:

we have given

annual return =​ 4%

return =​ 5%

spot rate = ​$1.43/pound​

forward rate = ​$1.44/pound

solution

we know that investor should invest in British security

because $\frac{1+0.04}{1+0.05}$  < $\frac{1.43}{1.44}$

investing in US security is less profitable

so it is false