9. Current one-year interest rates in Europe is 4 percent, while one-year interest rates in the U. S. is 2 percent. You convert $200,000 to euros and invests them in France. One year later, you convert the euros back to dollars. The current spot rate of the euro is $1.20. a. According to the IFE, what should the spot rate of the euro in one year be? b. If the spot rate of the euro in one year is $1.12, what is your percentage return from your investment? c. If the spot rate of the euro in one year is $1.31, what is your percentage return from your investment? d. What must the spot rate of the euro be in one year for your strategy to be successful?

Question

Jaydan Stout

Business

5 September, 21:42

9. Current one-year interest rates in Europe is 4 percent, while one-year interest rates in the U. S. is 2 percent. You convert $200,000 to euros and invests them in France. One year later, you convert the euros back to dollars. The current spot rate of the euro is $1.20. a. According to the IFE, what should the spot rate of the euro in one year be? b. If the spot rate of the euro in one year is $1.12, what is your percentage return from your investment? c. If the spot rate of the euro in one year is $1.31, what is your percentage return from your investment? d. What must the spot rate of the euro be in one year for your strategy to be successful?

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Answers (1)

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Jessica Juarez · Answer 1

Solution:

Given,

1 Year interest rates in Europe = 4 %

1 Year interest rates in the U. S. = 2 %

You are translating $200,000 and spending $200,000 in French

Current spot rate of the euro = $1.20

a. (2%-4%) / (1+4%) = (S - 1.20) / 1.20

S = $1.1769 one year Euro rate

b. ($1 / 1.20) (1 + 4%) * 1.12 = $.9707 return of - 2.93% (loss)

c. ($1 / 1.20) (1 + 4%) * 1.31 = $1.1353 return of 13.53% (gain)

d. ($1 / 1.20) (1 + 4%) * S = $1 (1+2%);

S=$1.1769

A spot rate of over $1.17697 (this is the same in part A) would be effective.