The Spot Exchange Rate for the British Pound Is 0

question 104

Multiple Choice

The spot exchange rate for the British pound is 0.5 pounds/dollar. The one-year interest rate in the United States is 4% and the one-year interest rate in Britain is 5%. Based on these rates, what one-year forward exchange rate is consistent with the absence of arbitrage?

• A) 0.606 pounds/dollar
• B) 0.612 pounds/dollar
• C) 0.617 pounds/dollar
• D) 0.505 pounds/dollar

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Definitions:

Overconfidence

The state of being more confident than is justified by one's abilities or the situation, potentially leading to errors in judgment.

Naturalistic Observation

A research method in which subjects are observed in their natural environment without any manipulation by the observer.

Placebo Effect

A psychological phenomenon where a fake treatment improves a person's condition simply because they believe the treatment will work.

Operational Definition

A carefully worded statement of the exact procedures (operations) used in a research study. For example, human intelligence may be operationally defined as what an intelligence test measures.