Question

 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 RM 3.13485 divided by $. Local currency time deposits of​ 180-day maturities are earning 8.900​% per annum. The London eurocurrency market for pounds is yielding 4.200​% per annum on similar​ 180-day maturities. The current spot rate on the British pound is $ 1.5820 divided by pound​, and the​ 180-day forward rate is $ 1.5561 divided by pound. The initial investment is1000000

The investment proceeds from the initial investment is

Answer 1

Intial Investment - GBP 1000000.

Step -1 Convert the GBP 1000000 to $ at todays spot rate GBP 1000000* $ 1.5820 per GBP =$1582000	Receive $1582000
Step-2 Convert the $ Received to RM at todays rate ($1 =RM 3.13485) =$1582000* RM 3.13485 =RM 4959333	Receive RM 4959333
Step -3 Invest the RM received @8.9% per anum interest for 180 days	invest RM 4959333
Step-4 After 180 days receive RM invested along with the interest. =RM 4959333 + (RM 4959333*8.9%*180/360) =RM 5180023	Receive RM 5180023
Step -5 Convert the RM received to $ at rate $1= RM 3.13485 ( as no information has been given for 180 days exchange rate between $ & RM, hence it is assumed that the current spot rate will prevail over 180 days also) Hence $ to be received by conversion =RM5180023 / RM 3.13485 per $ =$1652399	Receive $ 1652399
Step -6 Convert the $ received to GBP at 180days forward rate = $1.5561 =1 GBP Total GBP to be received = $1652399/ $1.5561 per GBP =GBP 1061884.84	RECEIVE GBP 1061884.84

Total GBP invested = GBP 1000000

Total GBP got after 180 days = GBP 1061884.84

Effective Return for 180 days= (GBP 1061884.84-GBP 1000000)/ GBP 1000000 *100 = 6.1884%