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Explain the money market and foreign exchange market

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Reference no: EM133128252

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 of the cash temporarily either in 90 days US treasury in dollars or 90 days French government security in Euro:

  • Your advice to the CEO must be based on:
  1. The interest rate differential between the two countries remains constant. 
  2. The current status of interest rates in the two countries will change.
  • Provide the equation that exhibits the state of equilibrium between the money market and the foreign exchange market in these two countries.
  • Explain why this equation represents the l?
  • 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.
  • Please provide some reasoning on how multinational corporations can use this theorem to mitigate the currency risk in their foreign business activities.
  • 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.

Reference no: EM133128252

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