Explore BrainMass

Explore BrainMass

    Investment in Different Currencies: Should the CFO invest in CDs denominated in dollars or in euros?

    Not what you're looking for? Search our solutions OR ask your own Custom question.

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    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 December 24, 2021, 4:58 pm ad1c9bdddf
    https://brainmass.com/economics/investments/investment-different-currencies-19034

    Solution Preview

    Alternative 1

    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 ...

    Solution Summary

    The solution compares investment in CD's denominated in dollars with investment in CD's denominated in euros. Calculations and answers are provided.

    $2.49

    ADVERTISEMENT