Assume that you are the CFO of a large company that has a lot of cash, the CEO of the company wants to invest some the cash temporarily either in 90 days US treasury in dollars or 90 days French government security in Euro:

You are asked for advice and you are given the following information:

• -Let i_NY = 90-day interest rate in New York.
• -Let i_Paris = 90-day interest rate in Paris.
• -Let E (e) = the expected spot rate in 90 days.

Your paper must encompass the followings:

• -The variables to include in your report to the CEO of your company must demonstrate the most profitable investment for the company at the lowest risk.
• -The five steps of calculations in your textbook to be explained, put in notation, and be converted into a mathematical formula.
• Your advice to the CEO must be based on:

1. a. The interest rate differential between the two countries remains constant.
2. b. The current status of interest rates in the two countries will change.

• -Provide the equation that exhibits the state of equilibrium between the money market and the foreign exchange market in these two countries.
• -Explain why this equation represents the Interest Rate Parity theorem?
• -How you can persuade your CEO that the Interest Rate Parity theorem is a reliable tool in forecasting the Dollar/Euro parity at the maturity date.
• -Please provide some reasoning on how multinational corporations can use this theorem to mitigate the currency risk in their foreign business activities.
• -Provide data for Expected Dollar/Euro rates and interest rates on 90 days securities from any financial website and Federal Reserve website and demonstrate your reasoning numerically.

Answer rating: 100% (QA)

The CEO has the option of investing the funds in either a 90day US Treasury bill or a 90day French government security note in dollars or euros First the difference in interest rates between the two n... View the full answer