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e exchange rate between the pound sterling and the dollar is currently $1.50 per pound, the dollar interest rate is 7% per year, and the pound interest rate is 9% per year. You have $100,000 in a one-year account that allows you to choose between either currency, and it pays the corresponding interest rate. a. If you expect the dollar/pound exchange rate to be $1.40 per pound a year from now and are indifferent to risk, which currency should you choose? b. What is the “break-even” value of the dollar/pound exchange rate one yea

e exchange rate between the pound sterling and the dollar is currently $1.50 per pound, the dollar interest rate is 7% per year, and the pound interest rate is 9% per year. You have $100,000 in a one-year account that allows you to choose between either currency, and it pays the corresponding interest rate. a. If you expect the dollar/pound exchange rate to be $1.40 per pound a year from now and are indifferent to risk, which currency should you choose? b. What is the “break-even” value of the dollar/pound exchange rate one yea

International Financial Management
International Financial Management
14th Edition
ISBN:9780357130698
Author:Madura
Publisher:Madura
Chapter4: Exchange Rate Determination
Section: Chapter Questions
Problem 31QA
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1. The exchange rate between the pound sterling and the dollar is currently $1.50 per pound, the dollar interest rate is 7% per year, and the pound interest rate is 9% per year. You have $100,000 in a one-year account that allows you to choose between either currency, and it pays the corresponding interest rate.

a. If you expect the dollar/pound exchange rate to be $1.40 per pound a year from now and are indifferent to risk, which currency should you choose?

b. What is the “break-even” value of the dollar/pound exchange rate one year from now?

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