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Ann just started a new job as an international investment analyst. In her new role, her supervisor asked her to research some international markets that might pose good investment options for the firm. In Ann's research, she comes across a fund in the United Kingdom that yields 8% and has had consistent earnings at this rate for the past 5 years.
The current exchange rate between the U.S. and the U.K. is 2 USD/1PD, or in essence it takes $2 USD to buy 1 UK pound. The current portfolio of investments that Ann has her money set up in within the U.S. yields a return of 6%. Both yields are annual. The 1-year futures rate of exchange for USD/PD is 1.25USD/1PD.
-Should Ann invest her company's money in the U.S. fund, or move it to the U.K. fund?
-What effect would the exchange rate have on the returns?
-Should inflation be considered in this situation? If so, why or why not?
-What other factors might one want to consider here before making a decision?
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