4 - retumS remain at 8 percent in London for British...

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b. As arbitrage inflow continues from point B, the positive interest differential in favor of OUT nation declines and the forward premium on the foreign currency increases. From B', the interest differential in favor of the foreign country increases and the forward discount on the foreign currency decreases. 14. a. At CIAP, there is no further possibility from increasing returns over and above those that investors can achieve in theÝr own country, but this does not mean that returns in the two ,t c- countries are equa1ized. ~;,~ Jjfi As proof of this, we can see that in the example given at the end of Section 14.6d, i1~~ annua1ized
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Unformatted text preview: retumS remain at 8 percent in London for British investors and are increased I from 6 percent to 6.852 for American Ýnvestors without considering transaction costs and 6.602 percent if we consider transaction costs of 1/4 of 1 percent investing in London. Thus, -returns become less unequal as a result of CIA, but are not equa1ized! ';~,;;'" ; App.1. a. The.V.S. investor wiIl get back ($200,000)(1.015}=$203,000. b. The V.S. investor wiIl get back $203,000+($200,000)(0.00213)= $203,000+$426=$203,426. c. The V.S. investor wiIl get back $205,000+($200,000)(0.0025)= $203,000+$500=$203,500, an overestimation of $74....
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