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Suppose the CFO of a British corporation with surplus cash flow had 40 million pounds sterling to invest last March 20, 2016 and the corporation did not believe it would need to utilize these funds to retool or expand production capacity for 1 year.
Suppose further that the interest rate on 1-year CD deposits in US banks was 1%, while the rate on 1 year CD deposits in England (denominated in British Pounds) was 1.5% at the time.
Suppose further that the exchange rate at that time was $1.50 per British pound. Assume that the CFO of the British company invests in US CD deposits and holds them until maturity 1 year later.
A) What must the CFO have expected about change in the value of the British pound over the year to believe in March, 2016 that investment in 1year US CD's would be more profitable than investment in British CD's.
(You do not need to supply a specific numerical answer. Identify the direction of change in the pound's value that the CFO was expecting.)
B) Suppose that now a year later the exchange rate is $1.40 per British pound. What rate of return did the CFO earn on the investment in the British CD? (You will need a specific numeric answer for full credit.)
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