What pressure is placed on the current spot exchange rate

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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

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