What pressure is placed on the current spot exchange rate

Reference no: EM132199053

Question: The following conditions exist in the foreign exchange market: Current spot rate: $1.80/pound Annualized interest rate on 90-day dollar-denominated bonds: 896(296 for 90 days) Annualized interest rate on 90-day pound-denominated bonds: 12% (3% for 90 days) All financial investors expect the spot exchange rate to be $1.77/pound in 90 days.

a. If a U.S. investor bases decisions solely on the expected rate of return, should that investor buy pound-denominated bonds or dollar-denominated bonds? Briefly explain.

b. If a United Kingdom investor bases decisions solely on the expected rate of return, should that investor buy pound-denominated bonds or dollar-denominated bonds? Briefly explain.

c. If these two investors' decisions are typical of other investors in the U.S. and U.K., what pressure is placed on the current spot exchange rate? Which currency will depreciate and which one will appreciate?

Reference no: EM132199053

Questions Cloud

Immediate purchase option : What are the trade-offs associated with including the immediate purchase option? How should you decide what the immediate purchase price

Find the equation of typical firm short-run supply function : A typical perfectly competitive firm in industry Y has the following short-run cost function. (Note: The answer to this question must be hand-written.)

Potential for resale among customers : Consider sanitizing body wipes, please devise a price discrimination scheme intended to increase total sales revenue. Response to this question

The average of the even elements of the array : Write a function double average(int arr[] , int n), that returns the average of the even elements of the array.

What pressure is placed on the current spot exchange rate : If these two investors' decisions are typical of other investors in the U.S. and U.K., what pressure is placed on the current spot exchange rate?

A function magnitude that computes the magnitude of a vector : Write a function magnitude that computes the magnitude of a vector, i.e., the square- root of the sum of the squares of the components of the vector.

Supply and demand curve for the coffee market : 1. How does Elasticity of demand relate to coffee prices and the current coffee market?

Write a function to decrypt a message : Write a function to decrypt a message that was encrypted using the Affine cipher .

What is a corporate merger : What is a corporate merger? What is an acquisition? What is the goal of antitrust policies?

User Account

All Pages