What pressure is placed on the current spot exchange rate

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Reference no: EM131213536

The following rates exist: Current spot exchange rate: $1.80/£ Annualized interest rate on 90-day dollar-denominated bonds: 8% (2% for 90 days) Annualized interest rate on 90-day pound-denominated bonds: 12% (3% for 90 days) Financial investors expect the spot exchange rate to be $1.77/£ in 90 days.

a. If he bases his decisions solely on the difference in the expected rate of return, should a U.S.-based investor make an uncovered investment in pound-denominated bonds rather than investing in dollar-denominated bonds?

b. If she bases her decision solely on the difference in the expected rate of return, should a UK-based investor make an uncovered investment in dollar-denominated bonds rather than investing in pound-denominated bonds?

c. If there is substantial uncovered investment seeking higher expected returns, what pressure is placed on the current spot exchange rate?

Reference no: EM131213536

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