The treasurer of a major U.S. firm has $30 million to investfor three months. Th

Question

The treasurer of a major U.S. firm has $30 million to investfor three months. The interest rate in the U.S. is .47percent per month. The interest rate in Great Britain is .19percent per month. The spot exchange rate is £0.52, andthe three-month forward rate is £0.51. Ignoring transactioncosts, in which country would the treasurer want to invest thecompany's funds? Why? Given Information: Amount to invest = $30 million Time (t) = 3 months Forward exchange rate for settlement at time t (F1)= SF ___ U.S. nomial risk-free interest rate (Rus) = 0.47percent per month Foreign country nominal risk-free interest rate(RFC) in this case is Great Britain or (RFC)= 0.19 percent per month Spot exchange rate (S0) = SF ____ The answers should be: US- $30,424,991 Britain - $30,762,920 The treasurer of a major U.S. firm has $30 million to investfor three months. The interest rate in the U.S. is .47percent per month. The interest rate in Great Britain is .19percent per month. The spot exchange rate is £0.52, andthe three-month forward rate is £0.51. Ignoring transactioncosts, in which country would the treasurer want to invest thecompany's funds? Why? Given Information: Amount to invest = $30 million Time (t) = 3 months Forward exchange rate for settlement at time t (F1)= SF ___ U.S. nomial risk-free interest rate (Rus) = 0.47percent per month Foreign country nominal risk-free interest rate(RFC) in this case is Great Britain or (RFC)= 0.19 percent per month Spot exchange rate (S0) = SF ____ The answers should be: US- $30,424,991 Britain - $30,762,920

Explanation / Answer

Total funds to be invested by treasurer : $ 30 M

Time : 3 Months

Spot Rate : 0.52 £/$

Forward Rate (3 months) : 0.51 £/$

Interest Rate in US : 0.0047% per month

Interest rate in Great Britain : 0.0019% permonth

Option 1 ( Invest in US )

Get after 3 months :

30* (1.0047)3 = $ 30.424992 M

Option 2 (Invest in GB)

First , Convert $ 30M into £ at spot Rate

He will have 30*0.52 = £ 15.6 M

Now Invest this amount in Great Britain

Get after three months : 15.6 * (1.0019)3= £ 15.689

Convert back to $ after 3 months at forward rate andget    15.689 * 1/0.51 = $ 30.7629 M

The Future value of amount invested is higher in GreatBritain in terms of $ i.e. $ 30.7629 Millions

So, He will invest in Great Britain

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