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 € per dollar and the six-month forward exchange rate is € per dollar. The treasurer of IBM does not wish to bear any exchange risk. Where should he/she invest to maximize the return?
2. While you were visiting London, you purchased a Jaguar for £35,000, payable in three months. You have enough cash at your bank in New York City, which pays % interest per month, compounding monthly, to pay for the car. Currently, the spot exchange rate is $/£ and the three-month forward exchange rate is $/£. In London, the money market interest rate is % for a three-month investment. There are two alternative ways of paying for your Jaguar.
(a) Keep the funds at your bank in the . and buy £35,000 forward.
(b) Buy a certain pound amount spot today and invest the amount in the . for three months so that the maturity value es equal to £35,000.
Evaluate each payment method. Which method would you prefer? Why?
3. Currently, the spot exchange rate is $/£ and the three-month forward exchange rate is $/£. The three-month interest rate is % per annum in the . and % per annum in the . Assume that you can
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