Exhibit 11.1 Assume the Following

question 154

Multiple Choice

Exhibit 11.1 Assume the following:
(1) the interest rate on 6-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 6-month forward price of the pound is $1.485.
-Refer to Exhibit 11.1.By investing in U.K.treasury bills rather than U.S.treasury bills,and not covering exchange rate risk,U.S.investors earn an extra return of:

• A) 4 percent per year,1 percent for the 6 months
• B) 4 percent per year,2 percent for the 6 months
• C) 2 percent per year,0.5 percent for the 6 months
• D) 2 percent per year,1 percent for the 6 months

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Definitions:

Centered

In statistics, adjusting data values by subtracting the mean of the data set from each value to have an average of zero.

Perfect Substitute

Goods or services that can be used in exactly the same way and are considered interchangeable by the consumer.

Indifference Curve

A graph representing combinations of two goods that provide an individual with the same level of satisfaction and utility.

Convex Preferences

A situation in consumer theory where a consumer prefers combinations or mixtures of goods to extreme amounts of either good, illustrating a desire for diversified consumption.