Compute the one-year usd return on investment

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Suppose an investment fund manager considers investing $10,000,000 either in one-year (1Y) US Treasury note or in a corresponding UK Government one-year bond (UK 1Y Gilt). The UK investment would be covered with a one-year forward contract. The current yield on a 1Y US Government bond was 0.13% (+0.0013), while the yield on a 1Y UK bond was -0.02% (-0.0002) on October 7, 2020 (at 3:50pm EST, Bloomberg data). The GBP in USD spot rate was 1.2918 and the 1Y forward rate was 1.2948.

(a) Compute the one-year USD return on investment in the US Government bond.

(b) Compute the one-year USD return on investment in the UK Government bond, adjusted for the forward to spot rate ratio.

(c) Which of the two investment alternatives is more profitable? Explain why.

Reference no: EM133063317

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