Suppose that you are the treasurer of DuPont with an extra U.S. $2,000,000 to invest for six months. You are considering the purchase of U.S. T-bills that yield 3.00% (thats a six month rate, not an annual rate by the way) and have a maturity of 26 weeks. You are also considering an investment in Germany. The spot exchange rate for the Euro is $1.53/ Euro and the six month forward rate is $1.49/Euro. The interest rate in Germany for 6 months (on an investment of comparable risk) is 8%. What is your strategy? Which is the more profitable choice?

MUST SHOW WORK

A. Take $2m, invest in U.S T-bills

B. Take $2m, translate into Euro at the spot, invest in Germany, and repatriate your German earnings back into dollars at the spot rate prevailing in six months.