A global manager plans to invest $1 million in U.S. government cash equivalents for the next90 days. However, she is also authorized to use non-U.S. government cash equivalents, as long as the currency risk is hedged to U.S. dollars using forward currency contracts.
a. What rate of return will the manager earn if she invests in money market instruments in either Canada or Japan and hedges the dollar value of her investment? Use the data in the following tables.
b. What must be the approximate value of the 90-day interest rate available on U.S. government securities?
Interest Rates (APR) 90-Day Cash Equivalents
Japanese government
2.52%
Canadian government
6.74%
Exchange Rates Dollars per Unit of Foreign Currency
Spot
90-Day Forward
Japanese yen
.0119
.0120
Canadian dollar
.7284
.7269
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