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22 January, 20:55

The treasurer of a major U. S. firm has $29 million to invest for three months. The interest rate in the United States is. 29 percent per month. The interest rate in Great Britain is. 33 percent per month. The spot exchange rate is £.629, and the three-month forward rate is £.632. What would be the value of the investment if the money is invested in the U. S. and in Great Britain?

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  1. 22 January, 22:11
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    Check the following calculations.

    Explanation:

    The U. S. firm has $29 million

    Investment is for three months

    And the interest rate in the United States is. 29 percent per month

    The value of the investment if the money is invested in U. S

    = $29 million * (1 + 0.29%) ^3

    = $29.2530 million

    The interest rate in Great Britain is. 33 percent per month.

    The spot exchange rate is £.629

    And the three-month forward rate is £.632.

    The value of the investment if the money is invested in Great Britain

    Value after spot exchange = $29 million * (£.629/$1) = £ 18.241 million

    Value after three months interest earning = £ 18.241 * (1+0.33%) ^3

    = £ 18.4222 million

    Exchanging again in US $ after 3 months

    = £ 18.4222 * ($1/£.632) = $29.1490 million

    Therefore the value of the investment if the money is invested in Great Britain is $29.1490 million.

    The value of investment will be more if the money is invested in U. S.
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