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