Assume the annual interest rate on a British pound denominated asset maturing in 30 days is 7.5 percent. The annual interest rate on a dollar-denominated asset maturing in 30 days is 8 percent. (30 days is approximately one-twelfth of a year!) Mtoto Company, a U.S. firm, wants to spend $18,000,000 to buy the pound-denominated asset or the dollar-denominated asset. The spot exchange rate is $1.258 per pound and the 30-day forward exchange rate is $1.3432 per pound. (a) How much (in dollars) will Mtoto Company make if it invests in the dollar-denominated asset? (b) How much (in dollars) will Mtoto Company make if it invests in the pound-denominated asset? (c) What do you think will happen to the value of the pound if interest rates remain the same?
Assume the annual interest rate on a British pound denominated asset maturing in 30 days is 7.5 percent. The annual interest rate on a dollar-denominated asset maturing in 30 days is 8 percent. (30 days is approximately one-twelfth of a year!) Mtoto Company, a U.S. firm, wants to spend $18,000,000 to buy the pound-denominated asset or the dollar-denominated asset. The spot exchange rate is $1.258 per pound and the 30-day forward exchange rate is $1.3432 per pound. (a) How much (in dollars) will Mtoto Company make if it invests in the dollar-denominated asset? (b) How much (in dollars) will Mtoto Company make if it invests in the pound-denominated asset? (c) What do you think will happen to the value of the pound if interest rates remain the same?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Assume the annual interest rate on a British pound denominated asset maturing in 30 days is 7.5 percent. The annual interest rate on a dollar-denominated asset maturing in 30 days is 8 percent. (30 days is approximately one-twelfth of a year!) Mtoto Company, a U.S. firm, wants to spend $18,000,000 to buy the pound-denominated asset or the dollar-denominated asset. The spot exchange rate is $1.258 per pound and the 30-day forward exchange rate is $1.3432 per pound.
(a) How much (in dollars) will Mtoto Company make if it invests in the dollar-denominated asset?
(b) How much (in dollars) will Mtoto Company make if it invests in the pound-denominated asset?
(c) What do you think will happen to the value of the pound if interest rates remain the same?
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