Assume the following information: U.S. investors have $1,000,000 to invest: 1-year deposit rate offered by U.S. banks = 10% 1-year deposit rate offered on British pounds = 13.5% 1-year forward rate of Swiss francs = $1.26 Spot rate of Swiss franc = $1.30 Given this information: A. interest rate parity exists and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically. B. interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield below what is possible domestically. C. interest rate parity exists and covered interest arbitrage by U.S. investors results in the same yield as investing domestically. D. interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically.
Assume the following information: U.S. investors have $1,000,000 to invest: 1-year deposit rate offered by U.S. banks = 10% 1-year deposit rate offered on British pounds = 13.5% 1-year forward rate of Swiss francs = $1.26 Spot rate of Swiss franc = $1.30 Given this information: A. interest rate parity exists and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically. B. interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield below what is possible domestically. C. interest rate parity exists and covered interest arbitrage by U.S. investors results in the same yield as investing domestically. D. interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically.
Chapter7: International Arbitrage And Interest Rate Parity
Section: Chapter Questions
Problem 11QA
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Question
Assume the following information:
U.S. investors have $1,000,000 to invest:
| 1-year deposit rate offered by U.S. banks | = |
10% |
| 1-year deposit rate offered on British pounds | = |
13.5% |
| 1-year forward rate of Swiss francs | = |
$1.26 |
| Spot rate of Swiss franc | = |
$1.30 |
Given this information:
A. interest rate parity exists and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically.
B. interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield below what is possible domestically.
C. interest rate parity exists and covered interest arbitrage by U.S. investors results in the same yield as investing domestically.
D. interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically.
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