While working as a summer intern at Washington Square Currency Advisors, you are assigned to a client with USD 10,000,000 to invest for one month. The client wants a safe investment that maximizes their USD return. Your boss likes a one-month German Treasury bill with a yield of 0.00% p.a. She thinks the German Treasury is superior to a one-month US Treasury bill with a yield of +1.80% p.a. Your boss is pretty smart, but this looks like a crazy idea to you, so you want to "run some numbers." 

 

Here is the other data you have to consider: Spot rate: 1.1515-25 USD/EUR 1-month forward rate: 1.1545-65 USD/EUR 

 

a. What is the ending value of the client's account after 1-month assuming a US Treasury investment? 

b. What is the ending value of the client's account after 1-month assuming a German Treasury investment that is fully hedged against currency risk? 

c. What transactions would you make to put the client into a 1-month German Treasury investment? List every step. Be specific. 

Answer rating: 100% (QA)

a The onemonth US Treasury bill has a yield of 180 pa Thus the ending value of the clients account a... View the full answer