On May 17, Peter, a U.S. investor, decided to buy three-month Treasury bills. He found that the per-annum interest rate on three-month Treasury bills is 8.00% in New York and 12.00% in London. Based on this information and assuming that tax costs and other transaction costs are negligible in the two countries, it is in Peter's best interest to purchase three-month Treasury bills, because it allows him to earn more for the three months. On May 17, the spot rate for the pound was $1.510, and the selling price of the three-month forward pound was $1.508. At that time, Peter chose to ignore this difference in exchange rates. In three months, however, the spot rate for the pound fell to $1.450 per pound. Thus, when Peter converted the investment proceeds back into U.S. dollars, his actual return on investment was As a result of this transaction, Peter realizes that there is great uncertainty about how many dollars he will receive when the Treasury bills mature. So, he decides to adjust his investment strategy to eliminate this uncertainty. What should Peter's strategy be the next time he considers investing in Treasury bills? Exchange half of the anticipated proceeds of the investment for domestic currency. Exchange large amounts of foreign currency for domestic currency. Contract in the forward market to sell the foreign currency in the amount of the proceeds from the investment. Had Peter used the covered interest arbitrage on May 17, his net return on investment (relative to purchasing the U.S. Treasury bills) in British three-month Treasury bills would be
On May 17, Peter, a U.S. investor, decided to buy three-month Treasury bills. He found that the per-annum interest rate on three-month Treasury bills is 8.00% in New York and 12.00% in London. Based on this information and assuming that tax costs and other transaction costs are negligible in the two countries, it is in Peter's best interest to purchase three-month Treasury bills, because it allows him to earn more for the three months. On May 17, the spot rate for the pound was $1.510, and the selling price of the three-month forward pound was $1.508. At that time, Peter chose to ignore this difference in exchange rates. In three months, however, the spot rate for the pound fell to $1.450 per pound. Thus, when Peter converted the investment proceeds back into U.S. dollars, his actual return on investment was As a result of this transaction, Peter realizes that there is great uncertainty about how many dollars he will receive when the Treasury bills mature. So, he decides to adjust his investment strategy to eliminate this uncertainty. What should Peter's strategy be the next time he considers investing in Treasury bills? Exchange half of the anticipated proceeds of the investment for domestic currency. Exchange large amounts of foreign currency for domestic currency. Contract in the forward market to sell the foreign currency in the amount of the proceeds from the investment. Had Peter used the covered interest arbitrage on May 17, his net return on investment (relative to purchasing the U.S. Treasury bills) in British three-month Treasury bills would be
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:On May 17, Peter, a U.S. investor, decided to buy three-month Treasury bills. He found that the per-annum interest
rate on three-month Treasury bills is 8.00% in New York and 12.00% in London. Based on this information and
assuming that tax costs and other transaction costs are negligible in the two countries, it is in Peter's best interest to
purchase
three-month Treasury bills, because it allows him to earn
more for the three
months.
On May 17, the spot rate for the pound was $1.510, and the selling price of the three-month forward pound was
$1.508. At that time, Peter chose to ignore this difference in exchange rates. In three months, however, the spot rate
for the pound fell to $1.450 per pound. Thus, when Peter converted the investment proceeds back into U.S. dollars,
his actual return on investment was
As a result of this transaction, Peter realizes that there is great uncertainty about how many dollars he will receive
when the Treasury bills mature. So, he decides to adjust his investment strategy to eliminate this uncertainty. What
should Peter's strategy be the next time he considers investing in Treasury bills?
O Exchange half of the anticipated proceeds of the investment for domestic currency.
O Exchange large amounts of foreign currency for domestic currency.
O Contract in the forward market to sell the foreign currency in the amount of the proceeds from the
investment.
Had Peter used the covered interest arbitrage on May 17, his net return on investment (relative to purchasing the
U.S. Treasury bills) in British three-month Treasury bills would be
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