process of Investment Bonds, Municipal Bonds, CDs, etc,
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The firm has $150,000 to invest in the spot, forward, or options markets.
The spot rate is $1.2622 to the euro, and in 12 months, the forward rate is $1.2905 to the euro.
However, this leader is sure that the exchange rate in 12 months will be $1.33 to the euro.
Explain how she can speculate on the belief that the euro will be $1.33 in 12 months.
Calculate the amount of profit (ignoring exchange rate fees) that will be earned and the percentage return achieved.
2. I have already calculated the numbers for purchasing the Euros at a spot rate detailed here:
The simply method of taking advantage of the belief that the exchange rate will be $1.33 per euro next year is as follws:
Purchase euros at the spot rate $150,000/1.2622 = ?118,840.12 euros
And then hold for 1 year
Then convert the euros back to dollars at $1.33 X 118,840.12 =$158,057.35
Profit is $158,057.35 - $150,000 = $8,057.35
Return on investment is ($8,057.35/$150,000) X 100 = 5.37%
3. Now, the instructor has made a comment that there may be other investments in bonds, municipal bonds, CDs, etc that offer much lower risk that can pay equal or a higher return.
4. This is where I need assistance. Please explain the process of Investment Bonds, Municipal Bonds, CDs, etc,
5. Explain which might be a better choice (other than my spot option in number 2) based on our scenario.
6. Please cite all references used.
Thanks!
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Solution Summary
A debt instrument is defined.
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A debt instrument is a paper or electronic obligation that enables the issuing party to raise funds by promising to repay a lender in accordance with terms of a contract. Types of debt instruments include notes, bonds, certificates, mortgages, leases or other agreements between a lender and a borrower.
Bonds: In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest (the coupon) and/or to repay the principal at a later date, termed maturity. A bond is a formal contract to repay borrowed money with interest at fixed intervals.
Notes: A promissory note, referred to as a note payable in accounting, is a contract where one party (the maker or issuer) makes an unconditional promise in writing to pay a sum of money to the other (the payee), either at a fixed or determinable future time or on demand of the payee, under specific terms.
Municipal Bonds: A municipal bond is a bond issued by a city or other local government, or their agencies. Potential issuers of municipal bonds include cities, counties, redevelopment agencies, ...
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