Ella, a portfolio manager, considered several ways to invest USD15 million for one year. The data are as follows: USD interest: 7% per annum (p.a.) GBP interest: 10% p.a. Spot exchange rate: USD1.3/GBP

1, How much John will get after 1 year, if he invests in the USD-denominated asset at 7%? 2, Supposed John invests his USD15 million in pound market, but he decides not to hedge the foreign exchange risk. What will be his dollar proceeds in 1 year if he assumes that the future spot rate is USD1.4/GBP? 3, Suppose John expects the pound to depreciate relative to the dollar by 2.5% over the next year. What are the conditional expectations of his future spot rate and dollar return in 1 year? 4, At what future value of the spot exchange rate S(t+1, USD/GBP) will John get his USD15 million principal back? 5, On the other hand, if John invests his USD15 million in the pound market, he decides to hedgethe foreign exchange risk with a 1-year forward exchange rate, USD1.05/GBP. What will be his dollar-denominated investment in 1 year?

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1 If John invests USD15 million in the USDdenominated asset at 7 interest per annum the amount he will receive after one year can be calculated using ... View the full answer