Question
You are an investment manager in Denmark. You see different interest rates around the world and your foreign exchange trading team (as always staffed by
You are an investment manager in Denmark. You see different interest rates around the world and your foreign exchange trading team (as always staffed by Stern alums) has provided you with the current spot rate and an expected future spot rate between the Danish and Mexican currencies. Hint/Warning: Be sure to check if youve adjusted interest rates for period and if you are really looking at e in the info. *Current spot exchange rate is 3.60 Pesos per Danish Krone. *Expected future spot rate in 30 days is 3.47 Pesos per Danish Krone *The 1 year interest rate on the Danish Krone-denominated bank deposit is 6.0% *The 1 year interest rate on the Mexican Peso-denominated bank deposit is 4.5% In which country will you earn the higher rate of return? Roughly speaking (we allow for rounding errors): If you invested 1 million Krone (converted to Pesos) into a Mexican bank and then returned it using this expected future spot rate and assuming it turned out to be accurate, how much more money would our firm make or lose in Mexico than our home country of Denmark (be sure to note if this was a gain or loss)?
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