Exxon, whose global sales are generally dollar denominated, finds it has excess

Question

Exxon, whose global sales are generally dollar denominated, finds it has excess cash of $10,500,000,000, which it can invest for up to three years. It has determined that its best options are either a three-year Euro-dollar ($) deposit paying 2.75% or a three-year Swiss Franc denominated deposit paying 1.65% since it expects the SF to appreciate 1.1% per annum against the dollar over the next three years. Using cash flow analysis determine the best currency option in which Exxon should invest. Be sure to show your complete calculations of the annual return on each investment at the end of the three-year term. Assume that the annual interest amount is reinvested, i.e. compounds, at the same annual interest rate. Would your answer change if Exxon revised its outlook for the SF to appreciate 1.2% per year? Show all calculations!!!

Explanation / Answer

For Eurodollar deposit, maturity value at end of three years: A= $ 10.5(1.0275)^3 billion = $11.39 billion For Swiss Franc Deposit, the interest rate for year i, taking conversion rate into account, is 1.65*(1.011^i) A= $10.5*1.0165^3*1.011*1.011^2*1.011^3 billion = $11.78billion Therefore, Exxon should invest in the Swiss Franc (CHF) deposit. The answer will not change if Exxon revised its outlook for CHF to 1.2%, as in that case it would be still higher.

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