Question

The treasurer of a major U.S. firm has $25 million to invest for three months. The interest rate in the United States is .25 percent per month. The interest rate in Great Britain is .30 percent per month. The spot exchange rate is £.625, and the three-month forward rate is £.628.

  

What would be the value of the investment if the money is invested in U.S and Great Britain? (Enter your answers in dollars, not in millions of dollars, and round your answers to 2 decimal places, e.g., 1,234,567.89.)

  

U.S.	$
Great Britain	$

Answer 1

Solution:
	The value of the investment if the money is invested in U.S and Great Britain
	U.S.	$25,187,500.00
	Great Britain	$25,104,498.41
Working Notes:
	U.S.
	The value of the investment if the money is invested = Amount invested + Interest earned
	Amount invested = $25,000,000
	Interest earned = $25,000,000 x 0.25% x 3
	Interest earned = $187,500
	The value of the investment if the money is invested = Amount invested + Interest earned
		=$25,000,000 + $187,500
		=$25,187,500
	Great Britain
	The value of the investment if the money is invested = Amount invested + Interest earned
	Amount invested = $25,000,000 x 0.625		multiply by 0.625 to convert it into pound
	Amount invested=15,625,000 pound
	Interest earned = 15,625,000 x 0.30% x 3
	Interest earned = 140,625 pound
	The value of the investment if the money is invested = Amount invested + Interest earned
		=15,625,000 + 140,625
		= 15,765,625 pound
	The value of the investment if the money is invested in $ = 15,765,625/0.628
			=$25,104,498.4076
	[divided by 0.628 to convert back to $]		=$25,104,498.41
Notes:	Interest given is in per month rate so multiplied by 3 , not in in per annum for we would have multiplied by 3/12
Please feel free to ask if anything about above solution in comment section of the question.