Suppose the Interest Rate on One-Year U

question 8

Multiple Choice

Suppose the interest rate on one-year U.S. T-bills is 4% and interest rate on one-year British T-bills is 6.5%. If the dollar is at a forward premium against the British pound of 1%, an American investor who does not want to face exchange-rate risk (but does want to earn the highest possible return) should:

• A)invest in dollar-denominated assets.
• B)invest in pound-denominated assets.
• C)forego use of the forward exchange rate market.
• D)do nothing because exchange-rate risk is unacceptable.

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Definitions:

Z Statistic

The Z statistic is a measure used in statistics to describe the distance in standard deviations a data point is from the mean of a data set.

Hypotheses

Predetermined statements or propositions that are tested through scientific methods to see if they hold true under specific conditions.

Relative Risk

The ratio of the probability of an event occurring in an exposed group to the probability of the event occurring in a control group.

Appropriate Values

Selected data points that are deemed suitable or fitting for a specific statistical analysis or context.