Question Details

Would the British investment provide an effective yield 



1. Effective Yield. Rollins, Inc., has $3 million in cash available for 180 days. It can earn 7% on a U.S. Treasury bill or 9% on a British Treasury bill. The British investment does require
conversion of dollars to British pounds. Assume that interest rate parity holds and that Rollins
believes the 180-day forward rate is a reliable predictor of the spot rate to be realized 180 days
from now. Would the British investment provide an effective yield that is below, above, or equal
to the yield on the U.S. investment? Explain your answer.


2. Effective Yield. Repeat question 9, but this time assume that Rollins, Inc., expects the 180-day forward rate of the pound to substantially overestimate the spot rate to be realized in 180 days.



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