Chapter 6 International Parity Relationships Essay examples
ANSWERS & SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS
1. Suppose that the treasurer of IBM has an extra cash reserve of $100,000,000 to invest for six months. The six-month interest rate is 8 percent per annum in the United States and 7 percent per annum in Germany. Currently, the spot exchange rate is €1.01 per dollar and the six-month forward exchange rate is €0.99 per dollar. The treasurer of IBM does not wish to bear any exchange risk. Where should he/she invest to maximize the return?
If $100,000,000 is invested in the U.S., the maturity value in six months will be $104,000,000.
Alternatively, $100,000,000 can be converted …show more content…
Selected Economic and Financial Data for U.S. and Mexico Expected U.S. Inflation Rate 2.0% per year Expected Mexican Inflation Rate 6.0% per year U.S. One-year Treasury Bond Yield 2.5% Mexican One-year Bond Yield 6.5%
Nominal Exchange Rates Spot 9.5000 Pesos = U.S. $ 1.00 One-year Forward 9.8707 Pesos = U.S. $ 1.00
Hamson recommends buying the Mexican one-year bond and hedging the foreign currency exposure using the one-year forward exchange rate. She concludes: “This transaction will result in a U.S. dollar holding period return that is equal to the holding period return of the U.S. one-year bond.”
a. Calculate the U.S. dollar holding period return that would result from the transaction recommended by Hamson. Show your calculations. State whether Hamson’s conclusion