If we consider an American investor in 2009 with 160 million Dollars to place in a bank deposit in either America or the UK. The (1 yr) interest rate on bank deposits is 6 percent in the UK and 1 percent in USA. The spot rate (which is the immediate exchange rate) is 160 Dollars per UK Pound.
Lets say investor deposits their money in America. He would have around 160,000,000(1.01) = 161,600,000 dollars in 2010.
If said investor deposits their money in the UK, they would alternatively have around (160,000,000/160)*(1.06) = 1,060,000 Pounds in 2010.
What would the exchange rate have to be for the investor to be INDIFFERENT in where they invest their money for a potential return in 2010?
My calculations lead me to believe that I'd simply divide 161,600,000/1,060,000 = 152.45, but I know through trial and error that I can get closer very easily..
Because when I multiply (160,000,000/152.45)(1.06) I get like 1.11 million, which is not equal to 161,600,000/152.45 - which is 1.06 million. To be indifferent, these would have to come out to the same values
..so I'm just wondering how I would approach this. Thanks!