Exhibit 11.1 Assume the Following: (1) the Interest Rate on Six-Month Treasury

question 138

Multiple Choice

Exhibit 11.1

Assume the following: (1) the interest rate on six-month treasury bills is 8 percent per annum in the United Kingdom and 4 percent per annum in the United States; (2) today's spot price of the pound is $1.50, while the six-month forward price of the pound is $1.485.

-Refer to Exhibit 11.1.If U.S.investors cover their exchange rate risk, then the extra return for the six months on the U.K.treasury bills is

• A) 1.0 percent.
• B) 1.5 percent.
• C) 2.0 percent.
• D) 2.5 percent.

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Definitions:

Owner's Equity

Represents an owner's total investment in a company after subtracting liabilities from assets; it signifies the net value an owner has in the business.

Liabilities

Financial obligations or debts that a company owes to others, which must be paid back in the future.

Assets

Resources owned or controlled by a business or individual, expected to produce positive economic value or benefits in the future.

Balance Sheet

A financial document that provides a snapshot of a company's assets, liabilities, and shareholders' equity at a specific point in time.