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?

Answer rating: 100% (QA)

Country 1 Expected return 0111 Depreciation rate 803 Foreign exchange rate at time zero 31 Country 1s currency to USD Total return in USD Investment 1 Expected return Depreciation rate USD 20 million 1 0111 00803 Total return in Country 1s currency Total return in USD Foreign exchange rate at time zero USD 20 million 1 0111 00803 3 Total return in Country 1s currency 20 million 1 0111 00803 3 442332592 Country 2 Expected return 0108 Depreciation rate 74 Foreign exchange rate at time zero 131 Country 2s currency units to USD Total return in USD Investment 1 Expected return Depreciation rate USD 20 million 1 0108 0074 Total return in Country 2s currency Total return in USD Foreign exchange rate at time zero USD 20 million 1 0108 0074 13 Total return in Country 2s currency 20 million 1 0108 0074 13 443384615 Comparing the total returns for each country Total return in Country 1 ... View the full answer