Dollar-denominated assets-the foreign exchange markets

Assignment Help Financial Management

Reference no: EM131062965

The 12-month interest rate on dollar-denominated assets (like bank deposits) is 5.00%. The 12-month interest rate on euro-denominated assets is 2.50%. The current spot exchange rate is $1.20 per €. The current forward exchange rate is $1.00 per €. You have an initial dollar fund of $100,000. Suppose that you have decided today to invest your dollar fund in euro-denominated assets while also using the forward exchange market to hedge the exchange risk.

1) Explain what you should do today on the foreign exchange markets.

2) Explain what you should do 12 months from now on the foreign exchange markets.

3) Compute your investment gain in euros. What is the euro rate of return on your euro deposits?

4) Compute your investment gain in dollars. What is the dollar rate of return on your euro deposits?

5) Is your investment decision consistent with the covered interest parity based on the full formula? Show your calculations to support your answer.

6) Is your investment decision consistent with the covered interest parity based on the approximating formula? Show your calculations to support your answer.

Reference no: EM131062965

Questions Cloud

What was the most recent dividend per share paid on t stock : Feeback Corporation stock currently sells for $77 per share. The market requires a return of 9.2 percent on the firm’s stock. If the company maintains a constant 2.6 percent growth rate in dividends, what was the most recent dividend per share paid o..

Create weighted average cost of capital-debt-equity ratio : A firm wants to create a weighted average cost of capital (WACC) of 7.2 percent. The firm's cost of equity is 10 percent and its pre-tax cost of debt is 8 percent. The tax rate is 34 percent. What does the debt-equity ratio need to be for the firm to..

Depreciated straight-line to zero over its six-year life : Your firm is contemplating the purchase of a new $636,000 computer-based order entry system. The system will be depreciated straight-line to zero over its six-year life. It will be worth $43,000 at the end of that time. If the tax rate is 30 percent,..

Sensitive is OCF to changes in quantity sold : Consider a three-year project with the following information: initial fixed asset investment = $710,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $34.75; variable costs = $22.90; fixed costs = $213,500; ..

Dollar-denominated assets-the foreign exchange markets : The 12-month interest rate on dollar-denominated assets (like bank deposits) is 5.00%. The 12-month interest rate on euro-denominated assets is 2.50%. The current spot exchange rate is $1.20 per €. Explain what you should do today on the foreign exch..

Create weighted average cost of capital : A firm wants to create a weighted average cost of capital (WACC) of 7.2 percent. The firm's cost of equity is 10 percent and its pre-tax cost of debt is 8 percent. The tax rate is 34 percent. What does the debt-equity ratio need to be for the firm to..

What discount rate would project have zero net present value : Suppose that the City of Old York is considering building a recreation center. Its estimated construction cost is $12 million, and there will be annual staffing and maintenance costs of $750,000 over the 20-year life of the project. Calculate the net..

Cost of capital and capital structure : Tea&Juices, a foreign producer of soft drinks, is considering expanding its activities to Canada. To evaluate the profitability of the business, the management has decided to use as benchmarks two other foreign producers of soft drinks who have alrea..

Deductible patent amortization expense : Bethany incurred $20,000 in research and experimental costs for developing a specialized product during July of year 1. Bethany went through a lot of trouble and spent $10,000 in legal fees to receive a patent for the product in August of year 3. If ..

User Account

All Pages