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Investment Options

Ann just started a new job as an international investment analyst. In her new role, her supervisor asked her to research some international markets that might pose good investment options for the firm. In Ann's research, she comes across a fund in the United Kingdom that yields 8% and has had consistent earnings at this rate for the past 5 years. The current exchange rate between the U.S. and the U.K. is 2 USD/1PD, or in essence it takes $2 USD to buy 1 UK pound. The current portfolio of investments that Ann has her money set up in within the U.S. yields a return of 6%. Both yields are annual. The 1-year futures rate of exchange for USD/PD is 1.25USD/1PD.

-Should Ann invest her company's money in the U.S. fund, or move it to the U.K. fund?
-What effect would the exchange rate have on the returns?
-Should inflation be considered in this situation? If so, why or why not?
-What other factors might one want to consider here before making a decision?

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Solution Preview

Ann should keep the money in US fund because the adverse exchange rate movement can result in losses for Ann's firm.

Let's assume that Ann has $100 to invest. If she puts the money in US fund, she will make $6 as interest and the balance at the end of the year would be $106. The earnings of the fund would ofcourse be affected by economic factors such as inflation, liquidity, government's ...

Solution Summary

Discusses selection of investments between US fund and UK fund.