You have $4,000. The current interest rates on dollar- and pound-denominated deposits for 180-day maturity are i^$=0.02 and i=0.03, respectively. The current spot exchange rate is e=$2/. Assume that you don't mind bearing foreign exchange risk. You expect the spot rate in 180 days to be $1.90/. What strategy would you follow, and why? After 180 days, the actual spot rate turns out to be $1.80/. Are you pleased with your decision? Why or why not?

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U.S Total Dollar Deposit $4,000 X.02 (2%) interest 80 $4,080 (Note: Doesn't Change after 180 Days) Dollar Deposit $4,000 X.02 (2%) interest 80 After 180 Days $4,080 (Note: Doesn't Change after 180 Days) Actual return after 180 Days U.S After 180 Days Britain: Initial Deposit Total Britain: Expected Deposit After 180 Days Total Britain: Actual Deposit After 180 Days $4,080 (Note: Doesn't Change after 180 Days) Total Euro Deposit $2/£ $4,000/2 £2,000 x.03 (3%) interest 60 £2060 x $2 (Exchange Rate) = $4,120 Euro Deposit $1.90/£ $4,000/1.90 = £2,105.26 x.03 (3%) interest 63.15 £2,105.26+ 63.15 = £2168.41 £2168.41 x 1.90 (Exchange Rate) = $4,119.97 Euro Deposit $1.80/£ $4,000/ 1.80 = £2,222.22 x.03 (3%) interest 66.66 £2,222.22 + 66.66 = £2,288.88 £2,288.88 x 1.80 (Exchange Rate) = $4,119.98 U.S Total Dollar Deposit $4,000 X.02 (2%) interest 80 $4,080 (Note: Doesn't Change after 180 Days) Dollar Deposit $4,000 X.02 (2%) interest 80 After 180 Days $4,080 (Note: Doesn't Change after 180 Days) Actual return after 180 Days U.S After 180 Days Britain: Initial Deposit Total Britain: Expected Deposit After 180 Days Total Britain: Actual Deposit After 180 Days $4,080 (Note: Doesn't Change after 180 Days) Total Euro Deposit $2/£ $4,000/2 £2,000 x.03 (3%) interest 60 £2060 x $2 (Exchange Rate) = $4,120 Euro Deposit $1.90/£ $4,000/1.90 = £2,105.26 x.03 (3%) interest 63.15 £2,105.26+ 63.15 = £2168.41 £2168.41 x 1.90 (Exchange Rate) = $4,119.97 Euro Deposit $1.80/£ $4,000/ 1.80 = £2,222.22 x.03 (3%) interest 66.66 £2,222.22 + 66.66 = £2,288.88 £2,288.88 x 1.80 (Exchange Rate) = $4,119.98

Answer rating: 100% (QA)

The best strategy would be to convert the 4000 to pounds and deposit it in a pounddenominated accoun... View the full answer