Question
INTERNAL FINANCE General Electric (GE) is a US firm that executes carry trade. The company borrows euros and invests in British pounds. GE can invest
INTERNAL FINANCE
General Electric (GE) is a US firm that executes carry trade. The company borrows euros and invests in British pounds. GE can invest $100,000 of its own funds and borrow an additional 600,000 euros at .5%. Assume the following:
GE can earn 1% on funds invested in Britain. The spot rates are: $1.20/ and $1.5/ at the start and end of the investment period. Using the table below, compute and explain how GE could capitalize on the interest rate differential.
Steps: |
| Exchange rate | Interest Rate |
| Computations |
1 |
|
|
|
|
|
2 |
|
|
|
|
|
3 |
|
|
|
|
|
4 |
|
|
|
|
|
5 |
|
|
|
|
|
6. |
|
|
|
|
|
7.
|
|
|
|
|
|
8.
|
|
|
|
|
|
9. |
|
|
|
|
|
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started