Question
You must make a $1,000,000 domestic payment in New York City in 90 days. The dollars are available now, and you decide to invest them
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You must make a $1,000,000 domestic payment in New York City in 90 days. The dollars are available now, and you decide to invest them for 90 days. The U.S. 90-day Treasury bill rate is 8.00% per annum. The U.K. 90-day Treasury bill rate is 10.00% per annum. The spot exchange rate is $1.8000 per pound sterling. The 90-day forward rate is $1.7800 per pound sterling.
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Where should you invest for maximum yield with no risk?
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Given the stated interest rates, what forward quotation would create an
equilibrium situation with no advantage or disadvantage associated with investing
in one country or the other? Ignore transactions costs.
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Would your decision about where to invest change if the U.K. interest rate were
14.00% per annum?
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Given the stated spot and forward exchange quotations and the U.S. interest rate,
what is the equilibrium or break-even U.K. interest rate?
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