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    Exchange Rates Impact on Investment Decisions

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    Suppose the CFO of a German corporation with surplus cash flow has 1 million Euros to invest. Suppose that interest rates on 1-year CD deposits in US banks are 2%, while rates on 1-year CD deposits denominated in Euros in German banks are currently 4.5%. Suppose further that the CFO expects that the (Euro/$) exchange rate will increase from 1 Euro per $ to 1.1 Euros per $ during the coming year. Should the CFO invest in CD's denominated in dollars or in Euros?

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    Solution Preview

    Option 1 (invest in the US)
    At the beginning of the year the 1,000,000 Euros can be exchanged into $1,000,000 (1 Euro per $). The $1,000,000 ...

    Solution Summary

    This solution looks at changes in exchange rates and their impact on investment decisions.