The treasurer of a major U.S. firm has $35 million to invest for three months. T
ID: 2489377 • Letter: T
Question
The treasurer of a major U.S. firm has $35 million to invest for three months. The interest rate in the United States is 0.23 percent per month. The interest rate in Great Britain is 0.29 percent per month. The spot exchange rate is £0.634, and the three-month forward rate is £0.636.
What would be the value of the investment if the money is invested in U.S and Great Britain? (Enter your answer in thousands of dollars, not in millions. (e.g., 1,234,567). Round your answer to 2 decimal places. (e.g., 32.16))
U.S. $ ________
Great Britain $_________
Explanation / Answer
Answer:
a) If Invested in US dollars :
Interest = (35 * 0.23%) * 3 = 0.2415
Therefore, Investment after three months = 35 + 0.2415 = $35.24 millions or 35,241,500.
b) If Invested in Great Britain Pounds:
Investment amount = 35 * 0.634 = £22.19
Interest = £(22.19 * 0.29%) * 3 = £0.193053
Therefore, Investment after months = 22.19 + 0.193053 = £22.38 millions or £22,383,053
Or 22.383053 / 0.636 = $35.19 million or $35,193,480.
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