Suppose a British investor is expected to receive payment of 150,000 dollars ($) in twelve months from a U.S. bank. The annual interest rate in dollar deposit is 5% and the annual interest rate in pound deposit is 10%. If the present exchange rate is 0.50 pound per dollar deposit and interest parity holds, then.(a) How many pounds does the British investor expect to receive at the maturity date of his U.S. investment? (Show the computation process).(b) How many pounds were initially invested? Fully explain all your answers (calculation).

Interest rate refers to the payment made in excess of the principal amount by the borrower to the lender. The lenders make profits from the interest received from the borrowers. The exchange rate is the value of one currency in terms of another currency. The exchange rate plays an important role in international transactions.a)The investor expects to get $15,000 in one year. The interest rate on dollar investment is 5 percent. Therefore the amount invested today in dollars can be calculated as, Amount invested today=$150,0001.05=$142,857.1429 The amount available today in pounds is calculated by multiplying the amount by the exchange rate. Amount available in pounds=$142,857.1429×0.50=71428.57 pounds The pound investment has an interest rate of 10 percent. If this amount was invested for one year, then the amount expected to receive after one year is calculated as, A=71428.57×1.10=78571.43 pounds Therefore the individual is expected to receive 78,571.43 pounds. b) The investor expects to get $15,000 in one year. The interest rate on dollar investment is 5 percent. Therefore the amount invested today in dollars can be calculated as, Amount invested today=$150,0001.05=$142,857.1429 The amount available today in pounds is calculated by multiplying the amount by the exchange rate. Amount available in pounds=$142,857.1429×0.50=71428.57 pounds Therefore the amount invested today is 71428.57 pounds.

Answered: uppose a British investor is expected…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Suppose a British investor is expected to receive payment of 150,000 dollars ($) in twelve months from a U.S. bank. The annual interest rate in dollar deposit is 5% and the annual interest rate in pound deposit is 10%. If the present exchange rate is 0.50 pound per dollar deposit and interest parity holds, then.

(a) How many pounds does the British investor expect to receive at the maturity date of his U.S. investment? (Show the computation process).

(b) How many pounds were initially invested? Fully explain all your answers (calculation).

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