Suppose a British investor is expected to receive payment of 10,000 dollars ($) in twelve months from a U.S. bank. The annual interest rate in dollar deposit is 5% and the annual interest rate in pound deposit is 10%. If the present exchange rate is 0.50 pound per dollar deposit and interest parity holds, then.

(a) How many pounds does the British investor expect to receive at the maturity date of his U.S. investment?

(b) How many pounds were initially invested? Fully explain all your answers.

Answer rating: 100% (QA)

To solve this problem we need to calculate the expected amount in pounds that the British investor w... View the full answer