Question

Q2: Suppose a US investor has $4000 to invest and can choose either a US investment paying 2% or a foreign investment paying 4%, where e is currently 1.14 and the investor can lock in e in one year equal to 1.16.

Q2a- How much will the US investment be worth after a year?

q2b- How much foreign currency can investor get now?

Q2c- How much foreign currency will investor get after a year?

Q2d-How much (in dollars) will the foreign investment be worth after a year?

Q2e-  Would investor prefer to invest?A- Domestic B- Foreign

Q3: Suppose a US investor has $8000 to invest and can choose either a US investment paying 3% or a foreign investment paying 4%, where e is currently 77 and the   investor can lock in e in one year equal to 78

Q3a- How much will the US investment be worth after a year?

Q3b- How much (in dollars) will the foreign investment be worth after a year?

Q3c- Would investor prefer to invest? domestic or foreign

Q4: Suppose a US investor has $12,000 to invest and can choose either a US investment paying 2% or a foreign investment paying 4%, where e is currently 12.

Q4a- How much will the US investment be worth after a year?

Q4b- What future e would leave the investor indifferent between investing at home or abroad?

Answer 1

2)

Investment amount = $4,000

Interest rate in US = 2%

Interest rate in foreign = 4%

Current exchange rate = 1.14

One year exchange rate = 1.16

a) US investment will be worth = 4,000 * 1.02 = 4,080 in one year

b) Investor can get now 4,000 / 1.14 = 3,508.77 of foreign currency

c) Investor will get 4,000 / 1.16 = 3,448.27 of foreign currency in one year

d) If Investor convert the US dollar into foreign currency, she will get 3,508.77 of foreign currency. This 3,508.77 will earn rate of interest of 4% per year which will make it 3,508.77 * 1.04 = 3,649.12. This 3,649.12 can now be converted back to US dollar which would be 3,649.12 * 1.16 = 4,232.98

e) Investor should invest in foreign currency because it makes the worth of your 4,000 more than the domestic investment.

3)

Investment amount = $8,000

Interest rate in US = 3%

Interest rate in foreign = 4%

Current exchange rate = 77

One year exchange rate = 78

a) US investment will be worth = 8,000 * 1.03 = 8,240 in one year

b) If Investor convert the US dollar into foreign currency, she will get 8,000 / 77 = 103.89 of foreign currency. This 103.89 will earn rate of interest of 4% per year which will make it 103.89 * 1.04 = 108.05. This 108.05 can now be converted back to US dollar which would be 108.05 * 78 = 8,428.05

c) Investor should invest in foreign currency because it makes the worth of your 8,000 more than the domestic investment.

4)

Investment amount = $12,000

Interest rate in US = 2%

Interest rate in foreign = 4%

Current exchange rate = 12

a) US investment will be worth = 12,000 * 1.02 = 12,240 in one year

b) To make consumer indifferent between choosing investment in US or foreign, money investment in foreign should give 240 as profit.

12,000 dollars can now be converted into 12,000 / 12 = 1,000 foreign currency. This will earn rate of interest equal to 1,000 * 1.04 = 1,040.

This 1,040 of foreign currency should be equal to 12,240 when converted back to US dollar. Exchange rate should be 12,240 / 1040 = 11.77