a) Microsoft, whose global sales are generally dollar denominated, finds it has

Question

a) Microsoft, whose global sales are generally dollar denominated, finds it has excess
cash of $750,000,000, which it can invest for up to three years. It has determined that its best options are either a three-year Euro-dollar ($) deposit paying 4.5% or a three-year Euro denominated deposit paying 5.5% since it expects the Euro to depreciate 1% per annum against the dollar over the next three years. Using cash flow analysis, determine in which currency Microsoft should invest. Be sure to show your complete calculations of the annual return and conversion of Euro back to dollars at the end of the three-year term.
Assume that the annual interest amount is reinvested, i.e. compounds, at the same annual interest rates. Would your answer change if Microsoft revised its outlook for the Euro to depreciate 1.25% per year?

Explanation / Answer

If the depreciation becomes 1.25% then:

The depreciation of euro = 1.0125 x1.0125x1.0125 -1 =1.03797-1=.038 =3.8%

So net interest earned for three year period = 17.42-3.8= 13.62%.

I would go for the first investment named Eurodollar paying 4.5%.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.