Solitaire Machinery, a U.S. company, plans to purchase a machine from its Canadi

Question

Solitaire Machinery, a U.S. company, plans to purchase a machine from its Canadian supplier three months from now. The cost of the machine at today is 150,000 Canadian dollars. Suppose in the spot market 1 U.S. dollar equals 1.72 Canadian dollars. 90-day Canadian securities have an annualized return of 3.4% and 90-day U.S. securities have an annualized return of 7.7%. Suppose interest rate parity holds. How much, in U.S. dollars, does Solitaire Machinery have to pay to buy this machine in three months from now?

Explanation / Answer

Cost of the Machine today = 150,000 Canadian Dollar (CND)

Spot Exchange Rate = 1.72 CND/Dollar

Or (1/1.72)Dollar/CND

= 0.5814 Dollar/CND

..

Cost of Machine Today in Dollar terms = 150,000 CND * Spot Exchange rate of Dollar/CND

= 150,000*0.5814

= Dollar 87210

..

90-day U.S. securities have an annualized return of 7.7%

..

So if we invest Dollar 87,210 for 90% at the risk free rate in US securities, amount we will have after 90 days in Dollar Terms =87210 + [87210*7.7%*(90/360)]

=87210 + 1678.79

= Dollar 88888.79

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.