Suppose that you are the treasurer of IBM with an extra US$1,000,000 to invest for six months. You are considering the purchase of U. S. T-bills that yield 1.810% (that's a six month rate, not an annual rate by the way) and have a maturity of 26 weeks. The spot exchange rate is $1.00 = ¥100, and the six month forward rate is $1.00 = ¥110. The interest rate in Japan (on an investment of comparable risk) is 13 percent. What is your strategy?

Take $1m, invest in U. S. T-bills.

Take $1m, translate into yen at the spot, invest in Japan, and repatriate your yen earnings back into dollars at the spot rate prevailing in six months.

Take $1m, translate into yen at the spot, invest in Japan, hedge with a short position in the forward contract.

Take $1m, translate into yen at the forward rate, invest in Japan, hedge with a short position in the spot contract.

Question

Holt

Business

9 April, 17:21

Suppose that you are the treasurer of IBM with an extra US$1,000,000 to invest for six months. You are considering the purchase of U. S. T-bills that yield 1.810% (that's a six month rate, not an annual rate by the way) and have a maturity of 26 weeks. The spot exchange rate is $1.00 = ¥100, and the six month forward rate is $1.00 = ¥110. The interest rate in Japan (on an investment of comparable risk) is 13 percent. What is your strategy?

Take $1m, invest in U. S. T-bills.

Take $1m, translate into yen at the spot, invest in Japan, and repatriate your yen earnings back into dollars at the spot rate prevailing in six months.

Take $1m, translate into yen at the spot, invest in Japan, hedge with a short position in the forward contract.

Take $1m, translate into yen at the forward rate, invest in Japan, hedge with a short position in the spot contract.

+5

Answers (1)

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Jazmin Harrington · Answer 1

Take $1m, translate into yen at the spot, invest in Japan, hedge with a short position in the forward contract.

Explanation:

a) $1,000,000 x 1.810 = 18,100 interest revenue

c)

convert into yen:

$1,000,000 x 100Y = 100,000,000Y

invest in Japan:

100,000,000Y x 13% = 113,000,000Y

short position in the forward contract:

113,000,000Y / 110Y = 1,027,272.727

return:

1,027,272.72 - 1,000,000 = 27,272.72

b) We are unware of the future spot rate, so it is better to use the forward contract and have no risk in the investment

d) incorrect.

there is no "spot contract" and we cannot convert to yen at the forward rate now. is in the future and only if we agre to sign the forward contract