Reference no: EM133239425
1. Suppose that the treasurer of IBM has an extra cash reserve of $100,000 to invest for six months. The interest rate is 8 percent per annum in the United States and 7 percent per annum in Germany. Currently, the spot exchange rate is 0.99 dollars per €, and the six- month forward exchange rate is 1.01 dollars per €. The treasurer of IBM does not wish to bear any exchange risk (no speculation). Where should he/she invest to maximize the return?
2. While you were visiting London, you purchased a Jaguar for £35,000, payable in three months. You have enough cash at your bank in New York City, which pays 0.35% interest per month, compounding monthly, to pay for the car. Currently, the spot exchange rate is $1.45/£, and the three-month forward exchange rate is $1.40/£. In London, the money market interest rate is 2.0% for a three-month investment. There are two alternative ways of paying for your Jaguar.
1. Keep the funds at your bank in the U.S. and buy £35,000 forward.
2. Buy a certain pound amount spot today and invest the amount in the U.K. for three months so that the maturity value becomes equal to £35,000. Evaluate each payment method. Which method would you prefer? Why?