PLEASE ANSWER ALL QUESTIONS AND SHOW WORK! 1. For this and the next 2. Suppose t

Question

PLEASE ANSWER ALL QUESTIONS AND SHOW WORK!

1. For this and the next 2. Suppose the following facts apply: Spot currency rate ($/ = $1.28); Forward exchange rate for 1 year delivery = $1.25; US 1-year interest rate: rUS = 4%; Euro 1-year interest rate: rE = 7%; Amount to invest = $5,000,000. You reside in the United States but wish to invest your $5 million in the 1-year European bonds. What is the future value of your investment in euros?

4,179,687.50

3,906,250.00

4,906,250.10

None of the above

2.  In order to execute a covered interest arbitrage, you sell 1-year euro futures. What is your rate of return on your overseas investments - after converting your investment proceeds back to USD?

4.045%

4.492%

7.125%

None of the above

Explanation / Answer

At the spot rate $5000000 will be converted to Euros

Amount in Euros= 5000000/1.28

Amount in Euros=3906250

This will be earn 7% for 1 year so amount at the end of 1 year

=3906250*(1+7%)

amount at the end of 1 year=4179687.5

The future value of your investment in euros= 4179687.5

Now if we convert these euros to USD at forward rate of $1.25

Amount in USD = 4179687.5*1.25

Amount in USD=$5224609.37

Returns earned= (5224609-5000000)/5000000

rate of return on your overseas investments - after converting your investment proceeds back to USD=4.492%

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