A US investor wants to buy £s spot, invest in the UK for 3 months and then sell

Question

A US investor wants to buy £s spot, invest in the UK for 3 months and then sell the proceeds in the spot market. The 3 month interest rate in UK is 1.25% (0.0125), today’s spot rate is £1 = $1.5, and the investor expects the spot rate to be £1 = $1.6 in 3 months time. What is the investor’s expected RATE of return from such an investment? Show and explain all relevant calculations.

Exam on this today. Please show me every step you make so I can figure out what I'm doing wrong, I almost have it!!!!

Explanation / Answer

By buying pounds forward for 3 months and selling them in the spot market, you can lock in an expected profit of $0.1, (1.6 - 1.5) per pound bought forward. This is a 3 month return return of 6.67% (0.1/1.5).

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.