Question
Suppose that you are the treasurer of Volkswagen with an extra 1,000,000 to invest for three months. You are considering the purchase of German T-bills
Suppose that you are the treasurer of Volkswagen with an extra 1,000,000 to invest for three months. You are considering the purchase of German T-bills that yield 0.610% (that's a three month rate, not an annual rate by the way) and have a maturity of 13 weeks. The spot exchange rate is 1.00 = 120, and the three month forward rate is 1.00 = 130. The interest rate in Japan (on an investment of comparable risk) is 6 % for three months. What is your strategy?
Select one:
a. take 1million, translate into yen at the spot, invest in Japan, repatriate your yen earnings back into euros at the spot rate prevailing in three months.
b. take 1 million, translate into yen at the spot, invest in Japan, hedge with a short position in the forward contract
c. take 1 million, invest in German T-bills
d. take 1million, translate into yen at the spot rate, invest in Japan, hedge with a long position in the forward contract
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