i_us= 5%, i_eu = 8%, one year forward rate = $1.25/Euro, spot rate = $1.10/Euro.

ID: 1122205 • Letter: I

Question

i_us= 5%, i_eu = 8%, one year forward rate = $1.25/Euro, spot rate = $1.10/Euro.

A U.S. Resident has $30,000 to invest; A European has 25,000 Euros to invest.

a)If the U.S. resident invests his Dollar in Dollar assets at the end of the year he will have $___

b)If the European invests his Euro in Dollar assets at the end of the year he will have ___ Euros.

c)If the U.S. resident invests his Dollar in Euro assets at the end of the year he will have $___

d)If the European invests his Euro in Euro assets at the end of the year he will have ___ Euros.

a)If the U.S. resident invests his Dollar in Dollar assets at the end of the year he will have $___

Solution: $31,500

Working: 30,000*(1+5%) = $31,500

b)If the European invests his Euro in Dollar assets at the end of the year he will have ___ Euros.

Solution: 23,100 Euros

Working: 25,000*1.10*(1+5%)/1.25 = 23,100 Euros

c)If the U.S. resident invests his Dollar in Euro assets at the end of the year he will have $___

Solution: $36,818.18

Working: 30,000/1.10*(1+8%)*1.25 = $36,818.18

d)If the European invests his Euro in Euro assets at the end of the year he will have ___ Euros

Solution: 27,000 Euros

Working: 25,000*(1+8%) = 27,000 Euros

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