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Suppose that you are considering placing $3000 in either a British or U.S. bank account...

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Accounting

Suppose that you are considering placing $3000 in either a British or U.S. bank account for one period and you would like to earn the greatest return possible. Further, suppose that todays spot rate is 0.67 pounds per dollar, the British interest rate is 2.5%, the U.S. interest rate is 2.9%, and the expected exchange rate one period from today is 0.6 pounds per dollar.

a) If you place $3000 in a U.S. bank account, how much do you expect to have after one period? Explain and show your work. (5 points)

b) If you instead buy pounds in todays spot market, place them in a British bank account for one period, and then convert them to dollars, how much do you expect to have? Explain and show your work. (10 points)

c) In this case, do you prefer to have U.S. or British bank account? What do you predict will happen to the spot exchange rate because of differences in returns? Explain (5 points)

d) Given todays interest rates and the expected exchange rate in one period, and using the interest rate parity condition, what must todays spot exchange rate be such that the expected return is the same for holding either pounds or dollars for one period? Explain and show your work. (10 points)

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