Homework: Global Economics & Business Initiatives
Assume that you are the CFO of a large company that has a lot of cash, the CEO of the company wants to invest some the cash temporarily either in 90 days US treasury in dollars or 90 days French government security in Euro:
You are asked for advice and you are given the following information:
a) Let iNY = 90-day interest rate in New York.
b) Let iParis = 90-day interest rate in Paris.
c) Let E (e) = the expected spot rate in 90 days.
Read Chapter 14 of the textbook along with seven other peer reviewed publications and write a 5-7 APA standard formatted paper. Your paper must encompass the followings:
1. The variables to include in your report to the CEO of your company must demonstrate the most profitable investment for the company at the lowest risk.
2. The five steps of calculations in your textbook (Chapter 14) to be explained, put in notation, and be converted into a mathematical formula.
3. Your advice to the CEO must be based on:
• The interest rate differential between the two countries remains constant.
• The current status of interest rates in the two countries will change.
I. Provide the equation that exhibits the state of equilibrium between the money market and the foreign exchange market in these two countries.
II. Explain why this equation represents the Interest Rate Parity theorem?
III. How you can persuade your CEO that the Interest Rate Parity theorem is a reliable tool in forecasting the Dollar/Euro parity at the maturity date.
IV. Provide some reasoning on how multinational corporations can use this theorem to mitigate the currency risk in their foreign business activities.
V. Provide data for Expected Dollar/Euro rates and interest rates on 90 days securities from any financial website and Federal Reserve website and demonstrate your reasoning numerically.
Format your homework according to the give formatting requirements:
• The answer must be using Times New Roman font (size 12), double spaced, typed, with one-inch margins on all sides.
• The response also includes a cover page containing the student's name, the title of the homework, the course title, and the date. The cover page is not included in the required page length.
• Also include a reference page. The references and Citations should follow APA format. The reference page is not included in the required page length.