Suppose that California Co., a U.S. based MNC, seeks to capitalize a difference in interest rates between euros and British pounds via the use of a carry trade. In particular, after 1 month, funds invested in euros will yield a 0.50% percent return, while funds invested in pounds will yield a return of 2.00% percent. Currently the spot rate of the British pound is $1.00 while the spot rate of the euro is $0.80. In other words, the pound is worth 1.25 euros. California Co. expects these spot rates to remain constant over the next month. After repaying their euro loan, California Co. has 211,200 pounds remaining. Assume that the exchange rate is still $1.00 per pound. These pounds are equivalent to $ California Co. used from their own funds. which represents a profit of $ over the initial $200,000 that
Suppose that California Co., a U.S. based MNC, seeks to capitalize a difference in interest rates between euros and British pounds via the use of a carry trade. In particular, after 1 month, funds invested in euros will yield a 0.50% percent return, while funds invested in pounds will yield a return of 2.00% percent. Currently the spot rate of the British pound is $1.00 while the spot rate of the euro is $0.80. In other words, the pound is worth 1.25 euros. California Co. expects these spot rates to remain constant over the next month. After repaying their euro loan, California Co. has 211,200 pounds remaining. Assume that the exchange rate is still $1.00 per pound. These pounds are equivalent to $ California Co. used from their own funds. which represents a profit of $ over the initial $200,000 that
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Suppose that California Co., a U.S. based MNC, seeks to capitalize a difference in interest rates between euros and British pounds via the use of a carry trade. In particular, after 1 month, funds invested in euros will yield a 0.50% percent return, while funds invested in pounds will yield a return of 2.00% percent.
Currently the spot rate of the British pound is $1.00 while the spot rate of the euro is $0.80. In other words, the pound is worth 1.25 euros. California Co. expects these spot rates to remain constant over the next month.
After repaying their euro loan, California Co. has 211,200 pounds remaining. Assume that the exchange rate is still $1.00 per pound.
These pounds are equivalent to $
, which represents a profit of $
over the initial $200,000 that California Co. used from their own funds.
Transcribed Image Text:Suppose that California Co., a U.S. based MNC, seeks to capitalize a difference in interest rates between euros and British pounds via the use of a
carry trade. In particular, after 1 month, funds invested in euros will yield a 0.50% percent return, while funds invested in pounds will yield a return of
2.00% percent.
Currently the spot rate of the British pound is $1.00 while the spot rate of the euro is $0.80. In other words, the pound is worth 1.25 euros. California
Co. expects these spot rates to remain constant over the next month.
After repaying their euro loan, California Co. has 211,200 pounds remaining. Assume that the exchange rate is still $1.00 per pound.
These pounds are equivalent to $
California Co. used from their own funds.
which represents a profit of $
over the initial $200,000 that
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