Consider the Following: an Investor in the U

question 85

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 i_f.The current exchange rate is $1.50/£.She considers the bonds to be of equal risk.If i = i_f, 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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Definitions:

Visa Card

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