Using the expected depreciation rate for each country, and assume the possibility of exchange risk in your investment decisions.

Assume an investment of USD 20 million, with one year maturity. Determine which country should you invest in order to obtain the higher return.  (Country 1 or Country 2)

Given:

Expected Returns for country 1= 0.111

Expected Returns for Country 2= 0.108

Depreciation Rate for Country 1: 8.03%

Depreciation Rate for Country 2: 7.4%

Foreign Exchange Rate at Time zero for Country 1:  Country 1's currency to USD is 3 / 1

Foreign Exchange Rate at Time zero for Country 2: Country 2's currency units to USD is 1.3 / USD

 

The question is: Which country do I invest in? Country 1 or Country 2?