QUESTION 13 25 p You are given the following information Int

QUESTION 13 2.5 p You are given the following information: Interest rate in U.S. is 7% while interest rate in Britain is 496, and the forward rate of the British pound has a 5% premium. Based on this information, we can conclude that: .- U.S. investors who attempt covered interest arbitrage earn a higher rate of return than if they invested in the U.S British investors who attempt covered interest arbitrage earn the same rate of return as if they invested in Britain. The forward premium on the pound must increase for interest rate parity to Interest rate parity holds and as an investor, it does not matter whether you invest at home or in the foreign country.

Solution

US investors who attempt covered interest arbitrage earn a higher rate of return than if they invested in the US