Question

In: Finance

An investor located in the US is planning to invest $24,000 in a fund in Brazil...

An investor located in the US is planning to invest $24,000 in a fund in Brazil that promises a risk free interest rate of 8.25%. The current exchange rate is Et = 5.45 and the investor believes the future exchange rate will be Et+1 = 5.32. What is the future value of a one year investment in Brazil, measured in US dollars?

A. $26,110.55

B. $26,614.85

C. $27,040.22

D. $27,559.39

Solutions

Expert Solution

Investment amount = $ 24000

Given Current Exchange rate : 1 USD = 5.45 BRL

Risk free rate in Brazil = 8.25%

Since we want toinvest in Brazil we have to convert our USD in BRL and invest in Brazil

Step 1: Converting USD into BRL

1 USD = 5.45 BRL

24000 USD = 24000*5.45 BRL

= 130800 BRL

Step 2:Investing 130800 BRL at a Risk free rate of 8.25%

Step 3: Computation of Future value of the amount

We know that Future value = Present value ( 1+i)^n

Here i= Interest rate and n = No.of years

Future value = 130800( 1+0.0825)

= 130800( 1.0825)

= 141591

Hence Future value is 141591.00 BRL

Step 4: Converting BRL into USD

Future Exchage rate : 1 USD = 5.32 BRL

1 USD /5.32 = BRL

141591* ( 1 USD /5.32 ) = 141591 BRL

26614.85 USD = 141591 BRL

Hence the Future value of a one year investment in Brazil is 26614.85 USD.So option b is correct.

If you are having any doubts,please post a comment.

Thank You. Please rate it.

jeff jeffy answered 1 year ago

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