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Selecting the profitable alternative

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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 1year 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 1euro per $ to 1.1 euros per $ during the coming year. Should the CFO invest in CD's denominated in dollars or in euros? Show your work to substantiate your response as credible.

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Solution Summary

Solution determines whether CFO should invest in CD's denominated in dollars or Euros.

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Case I - Deposit made in US dollars

Amount deposited in US=1 million Euros=1*1 =$1 M
Interest Rate=2%
FV of deposit after ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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