International Finance
EXERCISES
1. Suppose that a treasurer of Apple has an extra cash reserve of USD 100.000.000 to invest for six months. The six-month interest rate is 8 % per annum in the U.S. and 7 % per annum in Germany. Currently, the spot exchange rate is USD/EUR = 1.01 and the sixmonth forward exchange rate is USD/EUR = 0.99. The treasurer of Apple does not wish to bear any exchange risk. Where should he/she invest to maximize the return?
Investing in the US | Amount in USD | US | Amount in USD | | | 100.000.000,00 | 1,0399 | 103.992.032,00 | | Investing in Germany | Amount in EUR | GER | Amount in EUR | Amount in USD | | 101.000.000,00 | 1,0349 | 104.528.834,96 | 105.584.681,78 |
How we computed the results: Investing in the US | Amount in USD | US | Amount in USD | | | 100.000.000 | = (1,08)^(1/2) | = E4*D4 | | Investing in Germany | Amount in EUR | GER | Amount in EUR | Amount in USD | | =100.000.000*1,01 | = (1,07)^(1/2) | = E6*D6 | = F6*(1/0,99) |
The treasurer of Apple should invest in Germany to maximize Apple’s return. Despite the fact that the interest rate is higher in the USA, the appreciation of the Euro over the Dollar gives the investor a bigger gain when investing in Germany. To protect himself from the exchange risk, he must make sure that he has signed a contract in which he will exchange his money in Euros back to Dollars by today’s valid forward rate.
2. As of November 1, 1999, the exchange rate between the Brazilian real (BRL) and the USD was USD/BRL = 1.95. The consensus forecast for the U.S. and Brazil inflation rates for the next one-year period is 2.6 % and 20 %, respectively. What would you forecast the exchange rate to be around November 1, 2000?
In order to compute the exchange rate we will use the formula expressing the “Relative Purchasing Power Parity” in mathematical terms:
et = e0 1+iht1+ift = 1.95* 1.21.026 = 2,28
USD/BRL Today (e0) | BR Inflation (ih) | US Inflation (if) | 1,95 | 20%
1. Suppose that a treasurer of Apple has an extra cash reserve of USD 100.000.000 to invest for six months. The six-month interest rate is 8 % per annum in the U.S. and 7 % per annum in Germany. Currently, the spot exchange rate is USD/EUR = 1.01 and the sixmonth forward exchange rate is USD/EUR = 0.99. The treasurer of Apple does not wish to bear any exchange risk. Where should he/she invest to maximize the return?
Investing in the US | Amount in USD | US | Amount in USD | | | 100.000.000,00 | 1,0399 | 103.992.032,00 | | Investing in Germany | Amount in EUR | GER | Amount in EUR | Amount in USD | | 101.000.000,00 | 1,0349 | 104.528.834,96 | 105.584.681,78 |
How we computed the results: Investing in the US | Amount in USD | US | Amount in USD | | | 100.000.000 | = (1,08)^(1/2) | = E4*D4 | | Investing in Germany | Amount in EUR | GER | Amount in EUR | Amount in USD | | =100.000.000*1,01 | = (1,07)^(1/2) | = E6*D6 | = F6*(1/0,99) |
The treasurer of Apple should invest in Germany to maximize Apple’s return. Despite the fact that the interest rate is higher in the USA, the appreciation of the Euro over the Dollar gives the investor a bigger gain when investing in Germany. To protect himself from the exchange risk, he must make sure that he has signed a contract in which he will exchange his money in Euros back to Dollars by today’s valid forward rate.
2. As of November 1, 1999, the exchange rate between the Brazilian real (BRL) and the USD was USD/BRL = 1.95. The consensus forecast for the U.S. and Brazil inflation rates for the next one-year period is 2.6 % and 20 %, respectively. What would you forecast the exchange rate to be around November 1, 2000?
In order to compute the exchange rate we will use the formula expressing the “Relative Purchasing Power Parity” in mathematical terms:
et = e0 1+iht1+ift = 1.95* 1.21.026 = 2,28
USD/BRL Today (e0) | BR Inflation (ih) | US Inflation (if) | 1,95 | 20%