A U.S. Based company has a short-term cash balance of USD 10 million. The company intends to invest in government securities for 120 days. The current spot rate and futures exchange rate (December 2017 futures) of USD against GBP are 1.6971 and 1.6950 respectively. The U.S. treasury bill rate is 15 percent per annum. The British 120- day gilt rate is 5.60 percent per annum.

A U.S. Based company has a short-term cash balance of USD 10 million. The company intends to invest in government securities for 120 days. The current spot rate and futures exchange rate (December 2017 futures) of USD against GBP are 1.6971 and 1.6950 respectively. The U.S. treasury bill rate is 15 percent per annum. The British 120- day gilt rate is 5.60 percent per annum.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

A U.S. Based company has a short-term cash
balance of USD 10 million. The company intends
to invest in government securities for 120 days.
The current spot rate and futures exchange rate
(December 2017 futures) of USD against GBP are
1.6971 and 1.6950 respectively. The U.S. treasury
bill rate is 15 percent per annum. The British 120-
day gilt rate is 5.60 percent per annum.
Compute the implied rate, and advise the
company on its short-term investment strategy.

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