Holooly Plus Logo
Holooly Plus Logo

Question 8.MSE.13: Today, a U.S. dollar can be exchanged for 3 New Zealand doll...

Today, a U.S. dollar can be exchanged for 3 New Zealand dollars or for 1.6 Canadian dollars. The one-year CD (deposit) rate is 7 percent in New Zealand, is 6 percent in the United States, and is 5 percent in Canada. Interest rate parity exists between the United States and New Zealand and between the United States and Canada. The international Fisher effect exists between the United States and New Zealand. You expect that the Canadian dollar will be worth $.61 at the end of one year.

Karen (based in the United States) invests in a one-year CD in New Zealand and sells New Zealand dollars one year forward to cover her position.
Marcia (who lives in New Zealand) invests in a one-year CD in the United States and sells U.S. dollars one year forward to cover her position.
William (who lives in Canada) invests in a one-year CD in the United States and does not cover his position.
James (based in the United States) invests in a one-year CD in New Zealand and does not cover his position.

Based on this information, which person will be expected to earn the highest return on the funds invested? If you believe that multiple persons will tie for the highest expected return, name each of them. Briefly explain.

The "Step-by-Step Explanation" refers to a detailed and sequential breakdown of the solution or reasoning behind the answer. This comprehensive explanation walks through each step of the answer, offering you clarity and understanding.
Our explanations are based on the best information we have, but they may not always be right or fit every situation.
The blue check mark means that this solution has been answered and checked by an expert. This guarantees that the final answer is accurate.
Learn more on how we answer questions.
This Question has been Answered.
Subscribe
Already have an account?
Login

Related Answered Questions

Question: 8.MSE.4

a. The dollar is presently worth .8 euros. What is the direct exchange rate of the euro? b. The direct exchange rate of the euro is presently valued higher than it was last month. What does this imply about the movement of the indirect exchange rate of the euro over the last month? c. The Wall ...

Verified Answer:

a. A euro $1.25. b. The indirect value of the euro...
Question: 8.MSE.5

Assume that the Polish currency (called zloty) is worth $.32. The U.S. dollar is worth .7 euros. A U.S. dollar can be exchanged for 8 Mexican pesos. Last year a dollar was valued at 2.9 Polish zloty, and the peso was valued at $.10. a. Would U.S. exporters to Mexico that accept pesos as payment be ...

Verified Answer:

a. The peso is valued at $.125 today. Since the pe...
Question: 8.MSE.3

Is outsourcing by U.S. firms to foreign countries beneficial to the U.S. economy? Weigh the pros and cons, and offer your conclusions. ...

Verified Answer:

Outsourcing can be beneficial to the U.S. economy ...
Question: 8.MSE.6

Explain how each of the following conditions would be expected to affect the value of the Mexican peso. ...

Verified Answer:

a. Depreciate b. Appreciate c. Depreciate d. Appre...
Question: 8.MSE.7

One year ago, you sold a put option on 100,000 euros with an expiration date of one year. You received a premium on the put option of $.05 per unit. The exercise price was $1.22. Assume that one year ago, the spot rate of the euro was $1.20. One year ago, the one-year forward rate of the euro ...

Verified Answer:

a. The spot rate depreciated from $1.20 to $1.152....
Question: 8.MSE.8

Assume that the Federal Reserve wants to reduce the value of the euro with respect to the dollar. How could it attempt to use indirect intervention to achieve its goal? What is a possible adverse effect from this type of intervention? ...

Verified Answer:

The Fed could use indirect intervention by raising...
Question: 8.MSE.9

Assume that interest rate parity exists. The one-year nominal interest rate in the United States is 7 percent, while the one-year nominal interest rate in Australia is 11 percent. The spot rate of the Australian dollar is $.60. Today, you purchase a one-year forward contract on 10 million ...

Verified Answer:

[(1.07)/(1.11)] - 1 = -3.60%. So the one-year forw...
Question: 8.MSE.10

You go to a bank and are given these quotes:You can buy a euro for 14 Mexican pesos.The bank will pay you 13 pesos for a euro.You can buy a U.S. dollar for .9 euros.The bank will pay you .8 euros for a U.S. dollar.You can buy a U.S. dollar for 10 pesos.The bank will pay you 9 pesos for a U.S. ...

Verified Answer:

Yes, you can generate a profit by converting dolla...
Question: 8.MSE.11

Today’s spot rate of the Mexican peso is $.10. Assume that purchasing power parity holds. The U.S. inflation rate over this year is expected to be 7 percent, while the Mexican inflation over this year is expected to be 3 percent. Carolina Co. plans to import from Mexico and will need 20 million ...

Verified Answer:

[(1.07)/(1.03)] - 1 = 3.8835%. So the expected fut...
Question: 8.MSE.12

Tennessee Co. purchases imports that have a price of 400,000 Singapore dollars, and it has to pay for the imports in 90 days. It will use a 90-day forward contract to cover its payables. Assume that interest rate parity exists and will continue to exist. This morning, the spot rate of the Singapore ...

Verified Answer:

a. Less than because the discount would be more pr...