Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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You are a sales manager for Google Nexus and export cellular phones from the United States to other countries. You have just signed a deal to ship phones to a British distributor. The deal is denominated in pounds, and you will receive £700,000 when the phones arrive in London in 180 days. Assume that you can borrow and lend at 7% p.a. in U.S. dollars and at 10% p.a. in British pounds. Both interest rate quotes are for a 360-day year. The spot exchange rate is $1.4945/£, and the 180-day forward exchange rate is $1.4802/£. First, you can sell pounds forward for dollars. Second, you can borrow the present value of the pounds, and convert the loan principal to dollars in the spot market, and then use the pound receivable to pay off the interest plus principal on the loan at maturity. Assume that the dollar interest rate and the exchange rates are correct. Determine the closest sterling interest rate that would make your firm indifferent between the two alternatives. A) 10.48% B) 4.50% C) 9.10% D) 10.45% E) None of the above
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Transcribed Image Text:You are a sales manager for Google Nexus and export cellular phones from the United States to other countries. You have just signed a deal to ship phones to a British distributor. The deal is denominated in pounds, and you will receive £700,000 when the phones arrive in London in 180 days. Assume that you can borrow and lend at 7% p.a. in U.S. dollars and at 10% p.a. in British pounds. Both interest rate quotes are for a 360-day year. The spot exchange rate is $1.4945/£, and the 180-day forward exchange rate is $1.4802/£. First, you can sell pounds forward for dollars. Second, you can borrow the present value of the pounds, and convert the loan principal to dollars in the spot market, and then use the pound receivable to pay off the interest plus principal on the loan at maturity. Assume that the dollar interest rate and the exchange rates are correct. Determine the closest sterling interest rate that would make your firm indifferent between the two alternatives. A) 10.48% B) 4.50% C) 9.10% D) 10.45% E) None of the above
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Step 1: Alternative 1 :selling pounds forward for dollars
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Step 2: Alternative 2 Borrowing Present Value of Pounds, Converting to Dollars, and Using the Pound Receivab
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Step 3: Determine the Sterling Interest Rate Equivalence
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