Variable $ ¥ R (Bid deposit) 2% 6% R (ask borrowing) 3% 7% S ($ask/¥Bid) $1.3450
ID: 1175537 • Letter: V
Question
Variable
$
¥
R (Bid deposit)
2%
6%
R (ask borrowing)
3%
7%
S ($ask/¥Bid)
$1.3450/¥
$1.3450/¥
S ($bid/¥ask)
$1.4150/¥
$1.4150/¥
F ($ask/¥Bid)
$1.3200/¥
$1.3200/¥
F ($bid/¥ask)
$1.3500/¥
$1.3500/¥
1. Suppose an American with $5 million dollars invests for one year
a. In which country do you advise them to invest? (Show work)
b. Calculate their profit
2. Suppose a chinese client has 5million yuan to invest for one year
a. In which country do you advise them to invest? (Show work)
b. Calculate their profit
Variable
$
¥
R (Bid deposit)
2%
6%
R (ask borrowing)
3%
7%
S ($ask/¥Bid)
$1.3450/¥
$1.3450/¥
S ($bid/¥ask)
$1.4150/¥
$1.4150/¥
F ($ask/¥Bid)
$1.3200/¥
$1.3200/¥
F ($bid/¥ask)
$1.3500/¥
$1.3500/¥
Explanation / Answer
1. When american receives money after one year then he will get 50,00,000$ (1+3%) = 51,50,000$ and
when he invested in china , then
using spot rate 1 yen = 1.3450 $
1$=1/1.3450 yen ,
In yen = 50,00,000$/1.3450 = 37,17,472 yen
he requires this amount 37,17,472 yen to invest in china ,and after one year he will receive = 37,17,472 yen (1+7%) =39,77,695 yen
we will convert it using forward rate 39,77,695 yen*1.3450 = 53,50,000$
Therefore , he should invest in china and profit will be 53,50,000 $ - 51,50,000 $ = 2,00,000 $
2. When chinese receives money after one year then he will get 50,00,000 yen (1+7% ) = 53,50,000 yen
When he invested in america ,
using spot rate : 1 yen = 1.4150 $ , then he requires this amount = 50,00,000 yen * 1.4150 yen = 70,75,000 $ to invest
After one year , he will receive 70,75,000 $ (1+3%) = 72,87,250 $ ,
we will convert it into yen using forward rate 1 yen =1.3500 $
72,87,250$/1.3500$ = 53,97,963 yen , He should invest in america
Profit will be 53,97,963 yen - 53,50,000 yen =47963 yen
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