Question

Malaysian Risk. 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 RM3.13488/$. Local currency time deposits of​ 180-day maturities are earning 8.896​% per annum. The London eurocurrency market for pounds is yielding 4.202​% per annum on similar​ 180-day maturities. The current spot rate on the British pound is $1.5819/£​, and the180-day forward rate is $1.5564/£. The initial investment is £1,175,000.00.

The investment proceeds from the initial investment is £___ (Round to two decimal​ places.)

Answer 1

Facts Given

1. Spot Rate 1 USD = RM 3.1388
2. Spot Rate 1 Pound or 1 GBP = USD 1.5819
3. 180-Day Forward Rate for 1 Pound or 1 GBP = USD 1.5564
4. Initial Investment = GBP 1175000.00
5. Return on 180-days local currency time deposit is 8.896% per annum

Since, the money needs to be invested in Malaysian market in local currency, we first need to calculate RM equivalent to initial investment of GBP 1175000.00, which is computed as follows:

1 GBP = USD 1.5819

1 GBP = 1.5819 * RM 3.1388

1 GBP = RM 4.96526772

Therefore, GBP 1175000 = RM 4.96526772 *1175000.00 = RM 5834189.571

Now, today Clayton will invest RM 5834189.571 in 180-day RM time deposits at 8.896% per annum

Value of Investment after 180 days = RM 5834189.571*(100%+(8.896%*180/365)) = RM 6090139.464

Now, we should calculate GBP value of investment after 180 days

180-days Forward Rate , 1 RM = USD 1.5564*1/3.1388*1.5819 = USD 0.31345742

USD Value of investment after 180 days = RM Value * USD Rate = 60901394.635 * USD 0.31345742 = USD 1908999.392

180-days Forward Rate , 1 GBP = USD 1.5564

GBP value of investment after 180 days = 1908999.392 *1/1.5564 = GBP 1226548.05

Hence, The investment proceeds from the initial investment is £ 1226548.05