Consider the Following: an Investor in the U

question 61

Multiple Choice

Consider the following: an investor in the U.S. is pondering a one-year investment. She can purchase a domestic bond for $1,000 that has an interest rate of i or she can purchase a bond in England for 1,500 British pounds (£) that pays an interest rate of if. The current exchange rate is $1.50/£ . She considers the bonds to be of equal risk. If i = if, the expected returns are not equal. What do you know?

• A) The exchange rate is fixed between the U.S. and Britain
• B) The bonds initially sold for different prices
• C) Arbitrage doesn't work
• D) The exchange rate must be flexible

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