You must make a $1,000,000 domestic payment in New York City in 90 days. The dollars are available now, and you decide to invest them for 90 days. The U.S. 90-day Treasury bill rate is 8.00% per annum. The U.K. 90-day Treasury bill rate is 10.00% per annum. The spot exchange rate is $1.8000 per pound sterling. The 90-day forward rate is $1.7800 per pound sterling. a. Where should you invest for maximum yield with no risk? b. Given the stated interest rates, what forward quotation would create an equilibrium situation with no advantage or disadvantage associated with investing in one country or the other? Ignore transactions costs. c. Would your decision about where to invest change if the U.K. interest rate were 14.00% per annum? d. Given the stated spot and forward exchange quotations and the U.S. interest rate, what is the equilibrium or break-even U.K. interest rate?
You must make a $1,000,000 domestic payment in New York City in 90 days. The
dollars are available now, and you decide to invest them for 90 days. The U.S. 90-day
Treasury bill rate is 8.00% per annum. The U.K. 90-day Treasury bill rate is 10.00%
per annum. The spot exchange rate is $1.8000 per pound sterling. The 90-day forward
rate is $1.7800 per pound sterling.
a. Where should you invest for maximum yield with no risk?
b. Given the stated interest rates, what forward quotation would create an
equilibrium situation with no advantage or disadvantage associated with investing
in one country or the other? Ignore transactions costs.
c. Would your decision about where to invest change if the U.K. interest rate were
14.00% per annum?
d. Given the stated spot and forward exchange quotations and the U.S. interest rate,
what is the equilibrium or break-even U.K. interest rate?
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