--%>
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 : Architectural Symbolism-house-style

    Wriet a report on the term Architectural Symbolism:a study of house-style meanings ?

    		•
  • Q : Avoidable Interest The book says

    The book says "avoidable interest is the amount of interest cost during the period that a company could theoretically avoid if it had not made expenditures for the asset." This makes it sound like avoidable interest is the total amount of interest paid for an asset. I know it's not but I was wonder

    		•
  • Q : Accounting Acquisition Entry and

    Acquisition Entry and Consolidation Working Paper On January 31, 2014, Phoenix, Inc. acquired all of the outstanding common stock of Spark Corporation for $400 million cash plus 25 million shares of Phoenix' $10 par value common stock having a market value of $90 per share. Registration fees were $

    		•
  • Q : Free international trade in goods and

    Explain, how economic well-being of a country is improved through free international trade in the goods and services?

    		•
  • Q : Performing the capital budgeting

    Explain difference between performing the capital budgeting analysis from the parent firm’s perspective as opposed to the project perspective.

    		•
  • Q : Explain Discount Briefly explain the

    Briefly explain the term Discount and also describe their important types?

    		•
  • Q : Claim depreciation When an asset is

    When an asset is purchased and the similar is not employed for the financial year, must the company charge the depreciation and the reason for the similar?

    		•
  • Q : European Monetary System Discuss the

    Discuss the workings and arrangements of European Monetary System (EMS).

    		•
  • Q : Whether MNC open their manufactoring

    For most global companies, China symbolizes a very attractive market in terms of size and growth-rate. Yet, it ranks lower in words of economic freedom and higher in political risk than other countries' markets because it has a communist government. Despite such risks

    		•
  • Q : Calculate the PV You expect the price

    You expect the price of the stock 3 years from now to be $119.04 (i.e., you expect P ˆ   3  ?? = $119.04). Discounted at a 10% rate, what is the present value of this expected future stock price? In other words, calculate the PV of $119.04.&nb

    		•