INTERNATIONAL FINANCE. For this and the next question. Suppose the following fac

Question

INTERNATIONAL FINANCE. For this and the next question. Suppose the following facts apply: Spot currency rate ($/ = $1.28); Forward exchange rate for 1 year delivery = $1.25; US 1-year interest rate: rUS =4%; Euro 1-year interest rate: rE = 7%; Amount to invest = $5,000,000. You reside in the United States but wish to invest your $5 million in the 1-year European bonds. What is the future value of your investment in euros?

3,906,250.00

4,179,687.50

4,906,250.10

None of the above

3,906,250.00

4,179,687.50

4,906,250.10

None of the above

Explanation / Answer

Forward rate Given= $1.25

Since the rate differential is 3% , the US$ would depreciate to 1.31 a year hence

5lacs $ would become $520000 a year hence according to forward rate it would become $ 650,000, then converting them to Euros at 1.31 $ per euro

The value of of deposit in euro would be 496183.20

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