Desirable investment than long-term assets

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Reference no: EM132056433

1. Suppose that you are the treasurer of IBM with an extra US$1,000,000 to invest for six months. You are considering the purchase of U.S. T-bills that yield 1.810% (that's a six month rate, not an annual rate by the way) and have a maturity of 26 weeks. The spot exchange rate is $1.00 = ¥100, and the six month forward rate is $1.00 = ¥110. The interest rate in Japan (on an investment of comparable risk) is 13 percent. What is your strategy?

A. Take $1m, invest in U.S. T-bills.

B. Take $1m, translate into yen at the spot, invest in Japan, and repatriate your yen earnings back into dollars at the spot rate prevailing in six months.

C. Take $1m, translate into yen at the spot, invest in Japan, hedge with a short position in the forward contract.

D. Take $1m, translate into yen at the forward rate, invest in Japan, hedge with a short position in the spot contract.

Apparently it is C. Please explain. If possible explain difference between c and b

2. Short term assets generally earn a higher rate of return than long-term assets, making short term assets a more desirable investment than long-term assets.

True

False

Reference no: EM132056433

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