Suppose that the treasurer of IBM has an extra cash reserve
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Suppose that the treasurer of IBM has an extra cash reserve

1. Suppose that the treasurer of IBM has an extra cash reserve of $100,000,000 to invest for six months. The six-month interest rate is 8 percent per annum in the United States and 7 percent per annum in Germany. Currently, the spot exchange rate is €1.01 per dollar and the six-month forward exchange rate is €0.99 per dollar. The treasurer of IBM does not wish to bear any exchange risk. Where should he/she invest to maximize the return?

Hint
Accounts & FinanceWhen the predicted future exchange rate does not materialize and the firm suffers losses, exchange rate risk exists. The forward agreement can be used to hedge exchange rate risk. Multinational corporations frequently encounter it. The market conditions are summarized as follows:I$= 4.0%; i€= 3.0 %; S = €1.01/$; F = €0.99/$.If $100,000,000 is invested in the U.S., the maturit...

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