A corporate investment manager needs to invest $1,000,000 for the next 6 months.

Question

A corporate investment manager needs to invest $1,000,000 for the next 6 months. The current nominal rate of interest in the United States is 5%, while the nominal rate of interest in Argentina is 8%. Which of the following statements is MOST correct? Select one:

a. The manager is indifferent between investing the funds in the United States or Argentina because real returns will always be the same in the end.

b. The manager may decide to invest the funds in the United States due to the international Fisher effect, which suggests inflation in Argentina may make the extra interest income worth less in one year.

c. The manager cannot invest in Argentina because his company is investing dollars.

d. The manager should invest the funds in Argentina and make an extra $30,000 for the year.

Explanation / Answer

In such case the manager is indifferent between investing the funds in the United States or Argentina. Because if interest arte in Argentina is higher than USA but exchange rate may be different at point of investment and time of getting return.

Until he has not full information regarding current spot rate and forward exchange rate the investment would be indifferent. Might be inflation is higher in Argentina or might be there are some political problems. So manager has to research in and out about investment in Argentina then only he can decide where to invest.

Hence, Option (A) is correct answer.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

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