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 CDs denominated in dollars or in euros? Show your work.© BrainMass Inc. brainmass.com March 4, 2021, 5:56 pm ad1c9bdddf
CFO buys CDs denominated in euros for 1,000,000 Euro
At the end of 12 months Principal + Interest = P ( 1+ iEuro * n/12)
P= 1000000 Euro
iEuro = 4.50%
n= 12 months
Principal + Interest = P ( 1+ iEuro * n/12)= 1,045,000 Euro =1000000 *(1+4.5%*12/12)
Amount at the end of 12 ...
The solution compares investment in CD's denominated in dollars with investment in CD's denominated in euros. Calculations and answers are provided.