# Investment Implications of IRP and the IFE Today, a U.S. dollar can be exchanged for three New Zealand dollars. The one-year CD (deposit) rate in New Zealand is 7 percent, and the one-year CD rate in the United States is 6 percent. Interest rate parity exists between the United States and New Zealand. The international Fisher effect exists between the United States and New Zealand. Today a U.S. dollar can be exchanged for two Swiss francs. The one-year CD rate in Switzerland is 5 percent. The spot rate of the Swiss franc is the same as the one-year forward rate. Karen (based in the United States) invests in a one-year CD in New Zealand and sells New Zealand dollars one year forward to cover her position. James (based in the United States) invests in a one-year CD in New Zealand and does not cover his position. Brian (based in the United States) invests in a one-year CD in Switzerland and sells Swiss francs one year forward to cover his position. Eric (who lives in Switzerland) invests in a one-year CD in Switzerland. Tonya (who lives in New Zealand) invests in a one-year CD in the United States and sells U.S. dollars one year forward to cover her position. Based on this information, which person will be expected to earn the highest return on the funds invested? If you believe that multiple persons will tie for the highest expected return, name each of them. Explain.

FindFind

### International Financial Management

14th Edition
Publisher: Cengage
ISBN: 9780357130698
FindFind

### International Financial Management

14th Edition
Publisher: Cengage
ISBN: 9780357130698

#### Solutions

Chapter 8, Problem 37QA
Textbook Problem

## Investment Implications of IRP and the IFE Today, a U.S. dollar can be exchanged for three New Zealand dollars. The one-year CD (deposit) rate in New Zealand is 7 percent, and the one-year CD rate in the United States is 6 percent. Interest rate parity exists between the United States and New Zealand. The international Fisher effect exists between the United States and New Zealand. Today a U.S. dollar can be exchanged for two Swiss francs. The one-year CD rate in Switzerland is 5 percent. The spot rate of the Swiss franc is the same as the one-year forward rate.Karen (based in the United States) invests in a one-year CD in New Zealand and sells New Zealand dollars one year forward to cover her position. James (based in the United States) invests in a one-year CD in New Zealand and does not cover his position.Brian (based in the United States) invests in a one-year CD in Switzerland and sells Swiss francs one year forward to cover his position. Eric (who lives in Switzerland) invests in a one-year CD in Switzerland. Tonya (who lives in New Zealand) invests in a one-year CD in the United States and sells U.S. dollars one year forward to cover her position.Based on this information, which person will be expected to earn the highest return on the funds invested? If you believe that multiple persons will tie for the highest expected return, name each of them. Explain.

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