Chapter 21 Islander Corporation Composing the Optimal Currency Portfolio for Investing As the treasurer for the Islander Corporation, you must develop a strategy for investing the excess cash that will be available for the next year. The firm, based in the United States, currently has no transaction exposure to foreign currency movements. Assume the following data as of today SPOT EXCHANGE RATE 75 1.70 .86 006 1.00 ANNUALIZED INTEREST RATE CURRENCY Australian dollar British pound Canadian dollar Japanese yen U.S. dollar 13.00 12.5 11.0 8.0 9.0 Your forecasting department has provided you with the following forecasts of the spot rates one year from now CURRENCY Australian dollar British pound Canadian dollar Japanese yen U.S. dollar STRONGS SCENARIO S.66 1.58 85 0055 1.00 FAIRLY STABLE S SCENARI S.76 1.73 .85 WEAK S SCENARI0 S.85 1.83 91 0062 0072 1.00 1.00 The probability of the strong-dollar scenario is 30 percent, the probability of the fairly stable-dollar scenario is 40 percent, and the probability of the weak-dollar scenario is 30 percent. Based on the information provided, prescribe the composition of the investment portfolio that would maximize the expected value of the effective yield for each of four possible risk preferences. Chapter 21 Islander Corporation Composing the Optimal Currency Portfolio for Investing As the treasurer for the Islander Corporation, you must develop a strategy for investing the excess cash that will be available for the next year. The firm, based in the United States, currently has no transaction exposure to foreign currency movements. Assume the following data as of today SPOT EXCHANGE RATE 75 1.70 .86 006 1.00 ANNUALIZED INTEREST RATE CURRENCY Australian dollar British pound Canadian dollar Japanese yen U.S. dollar 13.00 12.5 11.0 8.0 9.0 Your forecasting department has provided you with the following forecasts of the spot rates one year from now CURRENCY Australian dollar British pound Canadian dollar Japanese yen U.S. dollar STRONGS SCENARIO S.66 1.58 85 0055 1.00 FAIRLY STABLE S SCENARI S.76 1.73 .85 WEAK S SCENARI0 S.85 1.83 91 0062 0072 1.00 1.00 The probability of the strong-dollar scenario is 30 percent, the probability of the fairly stable-dollar scenario is 40 percent, and the probability of the weak-dollar scenario is 30 percent. Based on the information provided, prescribe the composition of the investment portfolio that would maximize the expected value of the effective yield for each of four possible risk preferences