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What is the highest return you can expect

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You are in charge of managing $10 million for one year. You are allowed to invest only in the US or German government bonds, both of which are considered risk free. The money is needed exactly one year from now in dollars, and you are not allowed to take any risks with it. The interest rates on the dollar and the German bonds are, respectively, i = 0.02 and i = 0.05. The spot exchange rate is e = 0.90€/$ and the forward rate is e = 0.945€/$.

 

What is the highest return you can expect on the $10 million?

 

Assume that any contract you make must be backed by the assets that you already have.

 

Suppose that the interest rate on dollar accounts is equal to 2% (i$ = 0.02), the interest rate on Polish zloty accounts is equal to 4.5% (izl = 0.045), and the expected exchange rate between the dollar and the zloty one year from now is ee = 4 zl/$. Assume that the (uncovered) interest parity holds.

 

Find the spot exchange rate, e. (My Answer should be in zl/$ and round to the nearest tenth.)

 

Suppose that the interest rate on dollar accounts is equal to 2% (i$ = 0.02), the interest rate on Polish zloty accounts is equal to 4.5% (izl = 0.045), and the expected exchange rate between the dollar and the zloty one year from now is ee = 4 zl/$. Assume that the (uncovered) interest parity holds.

 

What would the spot rate, e, be if the expected exchange rate remains the same and the interest rate on Polish assets declines to izl = 0.02? (Answer in zl/$.)

Reference no: EM132473338

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