Problem 7. Assume that you are a US investor who has available $100,000,000 to invest for six months, and that the six-month interest rate is 5% in the US. In addition you know that the six-month interest rate in Italy is 4%. You also observe the following quotations: spot exchange rate USD 0.99 per 1 EUR and a six-month forward rate USD 1.01 per 1 EUR. Where should you invest to maximize the return of your investment? Explain the role of the appreciation/depreciation of the dollar in your answer. Is this forward rate an equilibrium rate? Let's consider that you are the manager of a multinational corporation that is not willing to be exposed to currency risk: what forward rate would be the equilibrium rate that covers against currency risk, given the same spot and interest rates?

Problem 7. Assume that you are a US investor who has available $100,000,000 to invest for six months, and that the six-month interest rate is 5% in the US. In addition you know that the six-month interest rate in Italy is 4%. You also observe the following quotations: spot exchange rate USD 0.99 per 1 EUR and a six-month forward rate USD 1.01 per 1 EUR. Where should you invest to maximize the return of your investment? Explain the role of the appreciation/depreciation of the dollar in your answer. Is this forward rate an equilibrium rate? Let's consider that you are the manager of a multinational corporation that is not willing to be exposed to currency risk: what forward rate would be the equilibrium rate that covers against currency risk, given the same spot and interest rates?

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter11: Managing Transaction Exposure

Section: Chapter Questions

Problem 57QA

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