Question

Variable $ ¥ R (Bid deposit) 2% 6% R (ask borrowing) 3% 7% S ($ask/¥Bid) $1.3450/¥ $1.3450/¥ S ($bid/¥ask) $1.4150/¥ $1.4150/¥ F ($ask/¥Bid) $1.3200/¥ $1.3200/¥ F ($bid/¥ask) $1.3500/¥ $1.3500/¥

1. Suppose an American with $5 million dollars invests for one year

a. In which country do you advise them to invest? (Show work)

b. Calculate their profit

2. Suppose a chinese client has 5million yuan to invest for one year

a. In which country do you advise them to invest? (Show work)

b. Calculate their profit

Answer 1

1. When american receives money after one year then he will get 50,00,000$ (1+3%) = 51,50,000$ and

when he invested in china , then

using spot rate 1 yen = 1.3450 $

1$=1/1.3450 yen ,

In yen = 50,00,000$/1.3450 = 37,17,472 yen

he requires this amount 37,17,472 yen to invest in china ,and after one year he will receive = 37,17,472 yen (1+7%) =39,77,695 yen

we will convert it using forward rate 39,77,695 yen*1.3450 = 53,50,000$

Therefore , he should invest in china and profit will be 53,50,000 $ - 51,50,000 $ = 2,00,000 $

2. When chinese receives money after one year then he will get 50,00,000 yen (1+7% ) = 53,50,000 yen

When he invested in america ,

using spot rate : 1 yen = 1.4150 $ ,  then he requires this amount = 50,00,000 yen * 1.4150 yen = 70,75,000 $ to invest

After one year , he will receive 70,75,000 $ (1+3%) = 72,87,250 $ ,

we will convert it into yen using forward rate 1 yen =1.3500 $

72,87,250$/1.3500$ = 53,97,963 yen , He should invest in america

Profit will be 53,97,963 yen - 53,50,000 yen =47963 yen