Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Nanotronics has accumulated some funds in the prior years and would like to avoid sitting idle on them.Several alternative are considered but none are perceived

Nanotronics has accumulated some funds in the prior years and would like to avoid sitting idle on them.Several alternative are considered but none are perceived to be viable.For instance, the stock market is volatile and is subject to a lot of uncertainty due to the pending elections and some stock market analysts' views that the market is fundamentally overvalued.The fixed income market does not offer much return at all.If you are persistent in your search, you may find a one-year CD that offers a mere 0.8 of one percent (note 0.8 of 1.0 percent, no 8 percent).The bond and the US treasury markets are in similar situations.With the Federal Funds Rate (FFR) at near zero (one quarter of one percent), the treasury notes and bonds do not also offer satisfactory returns.

The entrepreneurial attitude of the firm prompts it to think out of the box.How? What?Carry trade pops up.After some research, Nanotronics assembles the following data with the aim of executing a carry trade practice on $65,000.00 of its cash in the first round.In the first round, the firm stays conservative and decides not to tie up more than $65,000.00, with the aim of having its final position in USD.The firm needs to decide whether to invest (or deposit) the funds in the U.S. or in Mexico.The firm is looking for a riskless investment activity.Its horizon is exactly 9 months.

The following data are assembled.Note:Nanotronics is neither a banker nor an FX (foreign exchange) dealer.It takes the rates and figures in the market as they are given to it.

Spot rate:Buy rate MXN 19.235/USD;

Spot rate:Sell rateMXN 19.385/USD

Nine-month forward rate:Buy rate MXN 20.115/USD

Nine-month forward rate:Sell rateMXN 20.265/USD

U.S commercial interest rate (borrowing) 4.5 percent

U.S commercial interest rate (lending) 1.0 percent

Mexico commercial interest rate (borrowing or lending) 6.5 percent

Please guide Nanotronics where to invest.Cite the pros and cons of the investment activity you recommend.What happens if Nanotronics relaxes its desire to stay riskless?Then, discuss the pros and cons of such investment practice.Would it be possible to forecast the outcome if the risk factor is left open (not managed)? At the outset, how can a person check whether the U.S. and Mexican markets are in equilibrium or disequilibrium?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial And Managerial Accounting

Authors: Jerry J Weygandt, Paul D Kimmel, Jill E Mitchell

4th Edition

1119752620, 978-1119752622

More Books

Students also viewed these Accounting questions

Question

Date decision to be made (if known)

Answered: 1 week ago

Question

The background knowledge of the interpreter

Answered: 1 week ago

Question

How easy the information is to remember

Answered: 1 week ago