Use Interest Rate Parity to Answer This Question

question 59

True/False

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

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Definitions:

Specific Price

A precise valuation or cost assigned to a good, service, or asset in a specific transaction or scenario.

Specific Stock

Refers to the individual securities or shares issued by a company, representing ownership in that company.

Dow Jones

An American stock market index that shows how 30 large, publicly-owned companies based in the United States have traded during a standard trading session.

Price-Weighted Average

A stock index in which each company's influence on the index's performance is proportional to its stock price.