Suppose the 1-Year Risk-Free Rate of Return in the U

question 45

Multiple Choice

Suppose the 1-year risk-free rate of return in the U.S. is 5%. The current exchange rate is 1 pound = U.S. $1.60. The 1-year forward rate is 1 pound = $1.57. What is the minimum yield on a 1-year risk-free security in Britain that would induce a U.S. investor to invest in the British security?

• A) 2.44%
• B) 2.50%
• C) 7.00%
• D) 7.62%
• E) None of the options are correct.

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Definitions:

Salvage Value

The approximated financial value of an asset at the termination of its usability.

Required Rate of Return

The minimum percentage rate of return on an investment that a person or company deems acceptable, considering the risks involved.

Warehouse Cost

Expenses associated with storing, handling, and managing goods in a warehouse.

Working Capital

It is the difference between a company's current assets and current liabilities, indicating the liquidity available to fund operations.