--%>
Assignment Help - homework help

Increase the return without any exchange risk

Suppose that treasurer of IBM has an extra cash reserve of $1,000,000 to invest for the six months. Six-month interest rate is 8% per annum in U.S. and 6% per annum in the Germany. Presently, spot exchange rate is DM1.60 per dollar and six-month forward exchange rate is DM1.56 per dollar. Treasurer of the IBM does not want to bear any exchange risk. Where should he/she invest in order to increase the return?

E

Expert

Verified

Conditions of market can be summarized as:

   I$ = 4%; iDM = 3%; S = DM1.60/$; F = DM1.56/$.

If $1,000,000 is invested in U.S., maturity value in the six months will be

        $1,040,000 = $1,000,000 (1 + .04).

On the other hand, $1,000,000 is converted into the DM and is invested at German interest rate, having DM maturity value sold forward. In this case dollar maturity value will be

        $1,056,410 = ($1,000,000 x 1.60)(1 + .03)(1/1.56)

Evidently, it is better to invest $1,000,000 in the Germany with exchange risk hedging. 

   Related Questions in Financial Accounting

  • Q : Flexible and fixed budgets Give a brief

    Give a brief contrast between flexible and fixed budgets?

    		•
  • Q : Accounting Required parts are clearly

    Required parts are clearly describes at the end of the questions and additional resource contains the journal article related to question three.. Approx 2000 word assignment.. First Question is of not more than 1000 words to make memorandum and its example is given at end of assignment and require

    		•
  • Q : Computing opportunity cost of producing

    Country C is able to generate seven pounds of food or four yards of textiles per unit of input. Calculate the opportunity cost of producing food rather than textiles.  Also, compute the opportunity cost of producing textiles rather than food.

    		•
  • Q : Theory of the comparative advantage How

    How theory of the comparative advantage relates to the currency swap market?

    		•
  • Q : Uniform costing benefits The uniform

    The uniform costing executed? It is beneficial for an organization?

    		•
  • Q : Advantages and disadvantages of FDI

    State advantages and disadvantages of FDI as opposed to the licensing agreement with the foreign partner?

    		•
  • Q : Good international monetary system

    Explain criteria for the ‘good’ international monetary system.

    		•
  • Q : Contingent exposure and its benefits

    Describe the contingent exposure and also discuss some of the benefits of using currency options in order to maintain this type of currency exposure.

    		•
  • Q : State Return on Investment or ROI

    Return on Investment (ROI): It is a performance measure employed to calculate the efficiency of an investment or to compare the effectiveness of a number of various investments. To compute ROI, the advantage (return) of an investment is divided by the

    		•
  • Q : Foreign entity’s functional and parent

    Specify some of instances under FASB 52 that foreign entity’s functional currency would be same as the parent firm’s currency.

    		•