Question

Arkansas Co. believes in the international Fisher effect. It has excess funds that it can invest in money market securities for one year. It can invest in the U.S. at an interest rate of 4%, Japan at an interest rate of 2%, the United Kingdom at an interest rate of 6%, or Brazil at an interest rate of 9%. It would not cover any investment that it takes against exchange rate risk. Its expected return on its investment will be highest in_________________.

Answer 1

Answer: It would be the same across all the countries.

Step-by-step explanation:

The Fischer effect is used to describe the relationship that a country's interest rates and its exchange rate. That relationship is such that the differences between the different interest rates offered in various countries is captured by their exchange rate.

That means that whatever gains are made in interest rates will be eroded when the currency it was made in is converted to the local currency of the investor. As this company took no cover against exchange rate risk, all the countries are effectively offering the same rate as a result of the Fisher effect.