Suppose the 1-Year Risk-Free Rate of Return in the U

question 45

Multiple Choice

Suppose the 1-year risk-free rate of return in the U.S. is 5%. The current exchange rate is 1 pound = U.S. $1.60. The 1-year forward rate is 1 pound = $1.57. What is the minimum yield on a 1-year risk-free security in Britain that would induce a U.S. investor to invest in the British security?

• A) 2.44%
• B) 2.50%
• C) 7.00%
• D) 7.62%
• E) None of the options are correct.

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