Compute the difference in absolute returns between the two, Financial Management

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Compute the difference in absolute returns between the two

You have USD1 million to invest for 3 months (92 days). You have 2 alternatives. Alternative 1 is to deposit your USD for 3 months at USD LIBOR. Alternative 2 is to convert your USD to GBP and invest in a GBP commercial paper yielding LIBOR + 5bp, at the same time entering into a forward contract to sell the GBP for USD at the end of 3 months.

Compute the difference in absolute returns between the two investment choices.

Spot GBPUSD: 1.2477 – 83

3-month swap: 60/70

3 month GBP interest rates: 0.39% – 0.42%

3 month USD interest rates:0.90% – 0.92%.

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Financial Management: Compute the difference in absolute returns between the two

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