1) Suppose the CFO of a German
corporation with surplus cash flow has 1 million Euros to invest....

Question

1) Suppose the CFO of a German
corporation with surplus cash flow has 1 million Euros to invest. Suppose that
interest rates on 1-year CD deposits in US banks are 2%, while rates on 1year
CD deposits denominated in euros in German banks are currently 4.5%. Suppose
further that the CFO expects that the (euro/$) exchange rate will increase from
1euro per $ to 1.1 euros per $ during the coming year. Should the CFO invest in
CD's denominated in dollars or in euros? Show your work to substantiate your
response as credible! 5
pts.

Robert · Accepted Answer

Expected return from 1-year CD deposits in US banks in euro terms = U.S interest rate+ expected depreciation in euro = 0.02 + [(1.1-1)/1] = 0.12 or 12% 
Expected return from euro deposit (i.e. from 1year CD deposits denominated in euro = 4.

1) Suppose the CFO of a German corporation with surplus cash flow has 1 million Euros to invest. Suppose that interest rates on 1-year CD deposits in US banks are 2%, while rates on 1year CD deposits...

Solution

Answer To This Question Is Available To Download

Related Questions & Answers

Submit New Assignment