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Suppose you have one U.S. dollar with which you wish to purchase U.K. (one-year) bonds in period t. Which of the following expressions represents the amount of U.K. pounds you will receive in one year (i.e., period t+1) from purchasing U.K. bonds in period t?

Why is the answer 1+ i*? where i* is the UK interest rate

Wouldn't you first change the U.S dollar to U.K pounds?

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That does indeed not seem right. The correct expression would be $ EX_{t}(£/\$)(1+ i^{*}) $. You exchange the dollar for pounds and buy bonds in year t. Then you receive interest in year t+1.

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