Covered versus uncovered interest arbitrage

On May $17,$ Janet, an American investor, decided to buy three$-$month Treasury bills. She found that the per$-$annum interest rate on three$-$month

Treasury bills is $8\mathrm{.}00\%$ in New York and $12\mathrm{.}00\%$ in London, Great Britain. Based on this information and assuming that tax costs and other transaction

costs are negligible in the two countries, it is in Janet's best interest to purchase three$-$month Treasury bills in

to earn

more for the three months.

On May $17,$ the spot rate for the pound was $$1\mathrm{.}510,$ and the selling price of the three$-$month forward pound was $$1\mathrm{.}508.$ At that time, Janet chose to

ignore this difference in exchange rates. In three months, however, the spot rate for the pound fell to $$1\mathrm{.}450$ per pound.

When Janet converted the investment proceeds back into U$.$S$.$ dollars, her actual return on investment was

$.$

As a result of this transaction, Janet realizes that there is great uncertainty about how many dollars she will

$-4\mathrm{.}97\%$

nen the Treasury bills mature.

So$,$ she decides to adjust her investment strategy to eliminate this uncertainty.

What should Janet's strategy be the next time she considers investing in Treasury bills?

Contract in the forward market to sell the foreign currency in the amount of the proceeds from th

nt$.$

Exchange half of the anticipated proceeds of the investment for domestic currency.

Exchange large amounts of foreign currency for domestic currency.

Had Janet used the covered interest arbitrage strategy on May $17,$ her net return on investment $($relative to purchasing the U$.$S$.$ Treasury bills$)$ in

British three$-$month Treasury bills would be

$..($Note: Assume that the cost of obtaining the cover is zero.$)$