On September I, 1995, the treasurer of Volvo, the Swedish automotive manufacturer, is faced with the following investment dilemma: he could invest the 125 million Swedish crowns (SK) that will be available for the next 60 days in the Swedish money market and earn a return of 9% on an annual basis, he could invest his funds in the German money market and earn a much lower return of 6114%.

a) Do you have sufficient information to reach a decision as to selecting the optimal investment opportunity? What are the additional pieces of information needed to reach a meaningful decision?

b) On September I, 1995, the following information concerning the relationship between the Swedish crown and the Deutsche mark (DM) was made available: SKI = DM.50 on a spot basis; the DM was at a 3% premium (annual basis). Where should the funds be invested?

c) Does the Interest Rate Parity theory hold in the previous case? Why or why not?

d) How would a 10% withholding tax imposed by the German government on interest earnings accruing to nonresident foreign entities affect your decision in (b)?

e) What is the maximum rate of withholding tax that would leave your decision to invest your funds in the German money market unchanged?