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# Investment in dollar/euro denominated CDs

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Suppose the CFO of an American corporation with surplus cash flow has \$1 million to invest. Suppose that the interest rates on 3-month CD deposits in US banks is 2%, while rates on 3-month CD deposits denominated in euros in German banks are currently 4.2%. Suppose further that the CFO expects that the (euro/\$) exchange rate will increase from (.76) euros per \$ to (.8) euros per \$ during the coming year. Assume that the CFO plans to roll over the 3 month CD's for a year and that she does not expect their yields to change over that period....that is you can assume that the CFO plans to stay invested for a year and that she expects the annual % yield on \$ CD's to be 2%, and the annual yield on CD's denominated in Euro's to be 4.2%

Should the CFO invest in CD's denominated in dollars or in euros? Show your work!

https://brainmass.com/economics/exchange-rates/investment-in-dollar-euro-denominated-cds-30798

#### Solution Preview

Option 1: CDs denominated in \$

US interest rate on \$ CD deposits= 2%
Amount invested in \$ CDs= \$1,000,000
Amount at the end of 1 year, with interest being compounded every 3 months=
\$1,020,151 =(1+0.02/4)^4*1000000
(interest is compounded every 3 months since CDs are being rolled over every 3 ...

#### Solution Summary

The solution determines whether the CFO should invest in CD's denominated in dollars or in euros.

\$2.49