Currently, you have $10,000 to invest over five years. The interest rate in the

Question

Currently, you have $10,000 to invest over five years. The interest rate in the United States is 4% for invested dollars. The interest rate in Europe is 5% for invested euros. The interest rate in Japan is 6% for invested yen. Assume that these interest rates are expected to remain unchanged over the next five years. The current and expected exchange rates are given in Table P5.59.

Which of the following options (if any) will maximize your wealth in U.S. dollars at the end of five years?

Current Exchange Rates

Expected Exchange Rates Five Years from Now

$1 = 0.74 euro

$1 = 0.880 euro

$1 = 101.67 yen

$1 = 110 yen

Current Exchange Rates

Expected Exchange Rates Five Years from Now

$1 = 0.74 euro

$1 = 0.880 euro

$1 = 101.67 yen

$1 = 110 yen

Explanation / Answer

Answer: Investing in U.S:

Total amount after 5 years=10000+(10000*4%)*5 year

=$12000

Investing in europe:

Current exchange rate=1$=0.74 euro

Euro to be invest=10000*0.74=7400 Euro

Interest rec in 5 year=7400*5%=370*5 years=1850 Euro

Total euro after 5 years=7400+1850=9250 Euro

Euro to be converted in $=9250 Euro/0.880 euro=$10511.36

Investing in Japan:

Current exchange rate=1$=101.67 Yen

Yen to be invest=10000*101.67 yen=1016700 Yen

Interest rec in 5 year=1016700*6%=61002*5 years=305010 yen

Total Yen after 5 years=1016700 yen+305010 yen=1321710 yen

Yen to be converted in $=1321710/110 yen=$12015.55

Investing in japan will maximize your wealth in U.S. dollars at the end of five years.

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