Question

Clayton​ Moore's Money Fund.  Clayton Moore is the manager of an international money market fund managed out of London. Unlike many money funds that guarantee their investors a near​ risk-free investment with variable interest​ earnings, Clayton​ Moore's fund is a very aggressive fund that searches out relatively​ high-interest earnings around the​ globe, but at some risk. The fund is​ pound-denominated. Clayton is currently evaluating a rather interesting opportunity in Malaysia. Since the Asian Crisis of​ 1997, the Malaysian government enforced a number of currency and capital restrictions to protect and preserve the value of the Malaysian ringgit. The ringgit was fixed to the U.S. dollar at RM3.80​/$ for seven years. In​ 2005, the Malaysian government allowed the currency to float against several major currencies. The current spot rate today is RM3.13488/$. Local currency time deposits of​ 180-day maturities are earning 8.899​% per annum. The London eurocurrency market for pounds is yielding 4.196​% per annum on similar​ 180-day maturities. The current spot rate on the British pound is $1.5819/£​, and the​ 180-day forward rate is$1.5558/£. The initial investment is £1,000,000.00.

The investment proceeds from the initial investment is ( ANS) £nothing.( Round to two decimal​ places.)

The return on the​ 180-day investment is (ANS)%. (Round to three decimal​ places.)

If Clayton Moore invests in the Malaysian ringgit​ deposit, and accepts the uncovered risk associated with the​ RM/$ exchange rate​ (managed by the​ government), and sells the dollar proceeds​ forward, he should expect a return of

▼

4.196

6.202

8.899

3.80

​% on his​ 180-day pound investment. This is

▼

better

worse

than the

▼

4.196

6.202

3.80

8.899

​% per annum he can earn in the​ euro-pound market. ​ (Round the percentage to three decimal places and select from the​ drop-down menus.)

Answer 1

From Interest rate parity between Pound and Dollar

180 day Forward Rate/ Spot rate = (1+ Interest rate in Dollars *180/365)/(1+interest rate in pound*180/365)

=> 1.5558/1.5819 = (1+ Interest rate in Dollars *180/365) / (1+0.04196*180/365)

=> (1+ Interest rate in Dollars *180/365) = 1.003852046

=> Interest rate in Dollars = 0.007811 or 0.7811%

Expected 180 days spot rate of Dollar and Ringgit after 180 days

=Spot rate *(1+ interest rate in Ringgit*180/365)/(1+interest rate in Dollars *180/365)

=3.13488*(1+0.08899*180/365)/(1+0.007811*180/365)

=RM3.2599/$

The Initial Investment of  £1,000,000 can be converted to Dollars at the spot rate of 1.5819 to get $1,581,900

which can be converted to Ringgit at RM 3.13488 to get 1581900*3.13488 = RM 4959066.67

This amount invested at 8.899% p.a. results in RM 4959066.67*(1+0.08899*180/365) = RM5176697.69 after 180 days

This amount can be converted to $ at RM3.2599/$ to get $1587993.48

Which can then be converted to Pounds at 1.5558 to get  £1020692.56

So, interest rate expected for 180 days = 1020692.56/1000000 -1 =0.020693

Interest rate expected to be earned p.a. = 0.020693*365/180 =0.04196 or 4.196%

So, Clayton Moore should expect a return of 4.196% on Ringgit deposit (in terms of Pounds)

This is same as the 4.196% p.a.he can earn in the Euro-Pound market