It is widely expected that the revenue of company XYZ will start to increase in 1-year's time. Given this, your friend, Mr. Arbitrage, suggests the following investment strategy to you: Use your initial wealth of $10,000 USD to take advantage of higher UK interest rates. Specifically, the interest rate for a 1-year time-deposit in the UK is 7.5% (compared with 5% in the US). The current exchange rate is 1.25 USD per 1 GBP. Mr. Arbitrage suggests that in one-year's time, after collecting the higher interest income in the UK, you convert the GBP back to USD and buy XYZ stock. He claims the timing is perfect: you will be buying more XYZ stock at the time when the company's revenue is just taking off! 

Explain while clearly showing any calculations and assumptions if you agree or disagree with Mr. Arbitrage's advice. 

Answer rating: 100% (QA)

The investment strategy proposed by Mr Arbitrage involves taking advantage of the higher interest rates in the UK and the expected increase in revenue of company XYZ The strategy involves investing 10... View the full answer